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The United Kingdom has become the first country to adopt government monetary funding to finance the immediate cost of fighting the coronavirus, and the Bank of England directly funds the state’s spending needs on a temporary basis.
The move would allow the government to avoid the bond market until the Covid-19 pandemic abates despite facing criticism that it is involved in a Zimbabwe-style policy that has led to hyperinflation where it has persisted.
It highlights the extraordinary demands for cash that the government has experienced in recent weeks, which it believes it cannot immediately finance in the first-time market.
In a statement to financial markets on Thursday, the government announced that it would expand the size of the government’s bank account at the central bank, historically known as the “Means and Excise Facility”, which is normally only £ 370m.
This will increase to an effectively unlimited amount, allowing ministers to spend more in the short term without resorting to the first-time market. In 2008, a similar move saw the facility briefly increase to £ 20 billion.
The scale is likely to be large. The government has already tripled the amount of debt it wanted to raise in the financial markets in April from £ 15 billion announced in the March 11 Budget to £ 45 billion earlier this month.
Although the gilt market showed strong stress in mid-March as the coronavirus crisis deepened, the government has so far had little difficulty in raising funds, especially as the Bank of England has already committed to printing £ 200k millions to inject into the government bond market to ensure there was sufficient demand for gilts and to improve the functioning of the market.
This direct government monetary financing would be “temporary and short-term,” the Treasury said in its statement.
“In addition to temporarily smoothing government cash flows, the W&M Fund supports the role of the market by minimizing the immediate impact of raising additional funds in the sterling and gold money markets,” he added.
He said any drawing for this overdraft would be paid as soon as possible before the end of the year.
The market reaction was muted. The British pound was trading 0.1 percent higher against the US dollar at just under $ 1.24 shortly after the announcement, while the 10-year UK benchmark yield held steady at 0.37 percent.
The Media and Media facility had long been used as a means of government funding for daily spending before the Bank of England sold government bonds to the market, but in 2006 it had become an emergency fund with government financing by the Debt Management Office on a scheduled basis.
Less than a month ago, the Bank of England said there was little chance that the facility would need to be used, demonstrating how much stress government finances have suffered in recent weeks.
In a call to reporters on March 18, Andrew Bailey, BoE governor, said the facility was just a “historical feature.”
“I don’t think that right now we are facing an inability of the government to finance itself, so yes, it is there, but it is not a front-line tool,” Bailey said at the time.
Earlier this week, the governor vowed not to fall for government permanent monetary financing in an opinion column in the Financial Times.
He said that the Bank of England would not participate in permanent monetary financing, but did not rule out temporary operations that, he said, would not be inflationary.
“Short-term operations play an important role in stabilizing market conditions and counteracting any immediate tightening of monetary conditions,” Bailey wrote.
Fran Boait, executive director of Positive Money, an advocacy group, said: “This use of direct monetary financing demonstrates once and for all that the government does not depend on the market to finance its spending. Hopefully now we can have an honest debate on how our collective resources should be allocated. “
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