Despite losing an empire and the sterling as the world’s reserve currency, the U.K. managed for years to punch well above its weight on international economic and financial issues, often critically informing and influencing key decisions and policy pivots.
The policy announcements by the Bank of England and the U.K. Treasury yesterday suggest that this is still possible despite concerns about the unintended negative consequences of Brexit. In the process, they have set an important example for other central banks.
Let’s start with the Bank of England.
In an emergency meeting responding to the cascading supply and demand destruction caused by the coronavirus — not to mention the fear, unusual uncertainty, economic paralysis and balance sheet pressures — the bank’s Monetary Policy Committee followed counterparts in Canada and the U.S. by cutting its key rate by 50 basis points, to 0.25% from 0.75%, and joining in a “whatever it takes” narrative. But unlike other central banks, it didn’t stop there. In addition to relaxing the countercyclical buffer requirement imposed by banks, it did two notable things that I argued earlier the European Central Bank should do.
First, the BOE deployed measures targeting small and midsize businesses to specifically relieve pressures that would undermine growth and expose to harm some of the vulnerable segments of the population. Second, it signaled it was coordinating its actions with the U.K. Treasury, or what I refer to as a “whole of government” response.
Later on, Chancellor of the Exchequer Rishi Sunak announced 30 billion pounds ($34 billion) of fiscal stimulus. He also pledged to spend 600 billion pounds by 2025 on a huge infrastructure program.
Such actions are an important step both in designing a policy response to the particularly tricky challenges posed by the economic sudden stops caused by the coronavirus and in starting to pave a better path for enhanced productivity and growth over time. They are part of the necessary comprehensive response, and not just because of the speed with which economic interactions are coming to a halt. Policy problems are compounded by the lack of good data — the current set of data releases are immediately outdated — policy tools ill-suited for the task at hand, ballooning demands for bailouts, lagging global policy coordination and political complications in some countries.
The best way of getting to a desired destination is to take the first few steps. The Bank of England showed yesterday how this can be done. Mohamed A. El-Erian, Bloomberg
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