The Bank of England still has firepower to fight the Covid-19 emergency, but there is a longer-term challenge to make sure it has enough “headroom” to launch a big bond-buying operation when a future crisis hits, Andrew Bailey has said.
“There are times when we need to go big and go fast,” Mr Bailey, the BoE governor, told the Jackson Hole economic policy symposium on Friday, referring to the BoE’s decision in March to launch a £200bn round of quantitative easing — a much larger and more rapid bond-buying operation than previous ones.
The BoE believes this type of operation may be most effective at times when markets are seizing up — as looked possible in early March. The Monetary Policy Committee has since voted in June to expand QE further, but to slow its pace, because market conditions had normalised.
“We are not out of firepower by any means, and to be honest it looks from today’s vantage point that we were too cautious about our remaining firepower pre-Covid,” Mr Bailey said.
The MPC has reinforced its message on stimulus by stating that it will not tighten monetary policy without clear evidence that inflation is heading towards its target, and has also said that negative rates are “in the toolbox”, albeit unlikely to be used in the near future.
But Mr Bailey hinted that the BoE might want to unwind asset purchases before it moved to raise interest rates from their current low of 0.1 per cent, in order to make sure the central bank could “go big and go fast” with a decisive QE operation in a future crisis. It could also consider opening up its QE programme to a broader range of assets.
At present, there was a large stock of outstanding government bonds available for the central bank to purchase, he said, but “if negative shocks continue to arise from time to time before any reversal of the stock of asset purchases takes place”, the risk of running out of headroom would increase.