As the country eases its lockdown rules further, with more businesses being allowed to open up and European summer holidays on the cards, the Bank of England is also easing off.
Last week it decided to purchase an additional £100bn ($125bn) of Gilts by around the end of the year. This does not sound much like easing off, but it actually involves the Old Lady slowing down its rate of purchases. Andy Haldane, its chief economist, was a lone voice of dissent on the Monetary Policy Committee: he was more hawkish, voting against the increase.
The Bank’s media assault has not receded, however. Governor Andrew Bailey told Sky News that the UK could have struggled to borrow in the short term without his institution’s intervention in March. He also wrote a piece for Bloomberg opining that, when the time comes, it could be better to get rid of the purchased bonds before raising interest rates “on a sustained basis”.
While the Bank of England is well aware of the precarious state of the economy, this public output adds to the impression that the crisis is a period we can now look back on, as we look forward to the recovery and eventual end of QE.
Yet the risks to the economy and markets are numerous. While the immediate threat of coronavirus has diminished, rising case numbers in some US states and in Germany show that reopening higher risk industries must be done cautiously. Meanwhile, the UK is once more staring down the barrel of a no-deal Brexit in six months’ time.
And the financial meltdown in March that Bailey referred to could return. The Bank for International Settlements warned last week that another dollar funding squeeze is possible. Given where market valuations are, it is not hard to imagine a sharp, self-perpetuating shock, perhaps triggered by an event such as a contested result to the US presidential election.
Some analysts think it is likely the Bank will end up raising the amount QE purchases later in the year, and it is not hard to see why.
On the fiscal side, the UK government is considering further stimulus — for example, cutting VAT. But there is no chance of these types of tweaks turning the recovery into a V-shaped one.
The risk is in fact that the government turns off life support too early. From August to October, the furlough scheme — where the state steps in to pay the wages of employees that companies do not require in the short term — will become progressively more costly for employers, before it is scheduled to end at the end of October. This will probably cause job losses.
Some politicians and commentators also mutter darkly about high government spending; despite the ultra-low Gilt yields, some have not adjusted their view of finance since the last crash and remain scared of mythical bond vigilantes under the bed. Chancellor Rishi Sunak will be under some pressure to announce plans for fiscal consolidation by the end of the year.
This is a shame, because with rates so low, the government could mount a serious effort to reshape the economy and drive the recovery. As reported in GlobalCapital, suggested schemes include a fund for small and medium-sized businesses, a national wealth fund, and a green infrastructure splurge.
Turning off the taps too soon would risk turning the shape of the recovery from a bowl into a saucer. Either way, it will be a bumpy journey for markets over the next year.