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Government to borrow billions from Bank of England to prop up economy

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The UK government will borrow billions of pound from the the Bank of England for the first time since the 2008 financial crisis in order to prop up the economy to help with the coronavirus crisis.

This facility will provide the government with a temporary cash buffer so it can continue to provide emergency funding to support the NHS, businesses, charities and workers affected by the Covid-19 pandemic.

Edward Park, Deputy Chief Investment Officer at Brooks Macdonald, said: “The Bank of England has announced that it will directly finance the extra government spending as a result of the coronavirus outbreak. The alternative option would see the Treasury issuing gilts to finance the increased spending which would damage market liquidity. If the government wants to issue an increased quantity of gilts it will need to offer an improved yield for its debt and that increases competition for scarce capital.

“As part of the coronavirus response the government may need to issue several hundred billion of gilts, to do so would suck liquidity out of the system that is now sorely needed to fund corporate debt.

“Funding the UK government’s coronavirus budget deficit via the Ways & Means Facility makes perfect sense as it delays the squeeze on market liquidity that large scale gilt issuance brings. The Bank of England’s actions join a list of alternative policy measures that we have seen unveiled in the current crisis. These may not be particularly fiscally transparent or conform to ‘best practice’ but they are responding to an economy reeling from an economic slowdown that has been crammed into weeks rather than the quarters it has taken for previous recessions to reach the real economy.”

 




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