LONDON, March 26 (Reuters) - Following is a text of the Bank
of England's Monetary Policy Summary:
"Our MPC voted unanimously to maintain Bank Rate at 0.1%.
The committee also voted unanimously to continue with the
programme of £200 billion of UK government bond and sterling
non-financial investment-grade corporate bond purchases,
financed by the issuance of central bank reserves, to take the
total stock of these purchases to £645 billion.
"The Bank of England’s Monetary Policy Committee (MPC) sets
monetary policy to meet the 2% inflation target, and thereby
helps to sustain growth and employment. In that context, its
challenge over recent weeks has been to respond to the severe
economic and financial disruption caused by the spread of
Covid-19.
"The spread of the disease and the measures that are likely
to be needed to contain it have evolved significantly. The
economic consequences of these developments are becoming more
apparent and a very sharp reduction in activity is likely. Given
the severity of that disruption, there is a risk of longer-term
damage to the economy, especially if there are business failures
on a large scale or significant increases in unemployment.
"In the near term, many people will be unable to work for a
period and others are adjusting their working arrangements. Many
consumer-facing companies are now required to cease operations
for a time, while other businesses have also needed to cease or
scale back their activities. Household spending on social
activities and other delayable forms of consumption is likely to
decline materially.
"In an environment of heightened uncertainty, businesses are
likely to postpone investment decisions. Exports are likely to
weaken. These effects on economic activity will be offset partly
by temporarily higher spending on essential goods and services.
Nonetheless, business cashflows will be severely affected in a
way that, without support measures, would threaten material
numbers of businesses failing, and large and persistent rises in
unemployment.
"There is little evidence as yet to assess the precise
magnitude of the economic shock from Covid-19. It is probable
that global GDP will fall sharply during the first half of this
year. Unemployment is likely to rise rapidly across a range of
economies, as suggested by early indicators.
"In the United Kingdom, even before the introduction of the
most recent social distancing measures, the composite flash
output and expectation PMIs fell sharply in March to their
all-time lowest levels, consistent with a material contraction
in GDP. Other timely indicators of activity, such as footfall in
shops and the number of flights, have also declined sharply.
"There have been very significant moves in a range of
financial market prices and implied volatilities have risen to
historically elevated levels, with evidence of widespread
disruption to market functioning. Risky asset prices have fallen
and, in the period leading up to the MPC’s special meeting on 19
March, yields on longer-term government debt rose. Additional
demand for US dollar liquidity contributed to disruption in
dollar funding markets, and in other usually liquid markets. The
sterling exchange rate has depreciated sharply.
"Overall, UK and global financial conditions have tightened
materially. All major central banks have set out wide-ranging
policy responses that have helped to stabilise markets and
improve liquidity in government bond markets.
What public policy is doing
"The front line of combatting the challenges of Covid-19
comprises the extraordinary efforts of NHS health professionals,
carers and volunteers across the country.
"Monetary policy should take into account the broader public
policy response to reduce the disruptive consequences for
households and businesses of the spread of Covid-19. This should
help to minimise the longer-term damage to the economy when the
health crisis abates.
"In this environment, it is essential that monetary and
financial stability are maintained, as these are pre-requisites
of longer-term economic prosperity. Consistent with this, the
Bank of England has coordinated its actions with those of the UK
Government in order to ensure that these initiatives are
complementary and have maximum impact in supporting households
and businesses during this period of disruption.
"The Government has announced a series of substantial fiscal
support measures to alleviate some of the severe cashflow
problems facing businesses and households.
"The Bank of England also has a role to play in supporting
businesses and households through the economic disruption
associated with Covid-19.
"The Financial Policy Committee (FPC) reduced the UK
countercyclical capital buffer rate to 0% of banks’ exposures to
UK borrowers at its policy meeting on 9 March. This action
supports the ability of banks to supply the credit needed by
households and businesses. The FPC, together with the Prudential
Regulation Committee, will monitor closely the response of banks
to recent measures, as well as the credit conditions faced by UK
businesses and households more generally.
"On 17 March, HM Treasury announced the creation of the
Covid Corporate Financing Facility (CCFF), for which the Bank
would act as HM Treasury’s agent. This will provide funding to
businesses by purchasing commercial paper of up to a one-year
maturity. As an alternative source of finance for larger
companies, the scheme will help preserve the capacity of the
banking system to lend to other companies, including small and
medium-sized enterprises.
"The CCFF is being funded by the issuance of additional
central bank reserves but is set up in a separate legal entity
from the Bank and from the Asset Purchase Facility. The MPC will
continue to decide on the overall amount of asset purchases that
are financed by central bank reserves. It is therefore taking
the size of the CCFF into account when taking its decisions on
the target stock of government and corporate bonds financed by
reserves necessary to fulfil its remit.
The role of monetary policy
"As set out in the Chancellor’s letter on 11 March, the MPC
has statutory objectives to maintain price stability and,
subject to that, to support the economic policy of the
Government including its objectives for growth and employment.
The updated remit letter confirms that the operational target
for monetary policy remains an inflation rate of 2% measured by
the 12-month increase in the Consumer Prices Index (CPI).
"CPI inflation was 1.7% in February. Prior to recent
developments, inflation was already set to fall further below
the MPC’s 2% target. It is now likely to decline to below 1% in
the spring, reflecting the pass-through to fuel prices of the
recent and sharp decline in the oil price. Further ahead,
inflation will be boosted by the significant depreciation of the
sterling exchange rate. The MPC will be monitoring closely
developments in inflation and in indicators of inflation
expectations, including those of households, businesses and
financial markets. Financial market measures of inflation
expectations have not risen over recent weeks.
"The nature of the economic shock from Covid-19 is very
different from those to which the MPC has previously had to
respond. The scale and duration of the shock to economic
activity, while highly uncertain, will be large and sharp but
should ultimately prove temporary, particularly if job losses
and business failures can be minimised. In the current
circumstances, and consistent with the MPC’s remit, monetary
policy is aimed at guarding against an unwarranted tightening in
financial conditions and, more broadly, supporting businesses
and households through the crisis and limiting any lasting
damage to the economy.
What the MPC is doing
"Over recent weeks, the MPC has reduced Bank Rate by 65
basis points, from 0.75% to 0.1%, and introduced a Term Funding
scheme with additional incentives for Small and Medium-sized
Enterprises (TFSME). It has also announced an increase in the
stock of asset purchases, financed by the issuance of central
bank reserves, by £200 billion to a total of £645 billion. Those
purchases are being undertaken as soon as operationally
possible, consistent with improved market functioning. The
majority of additional asset purchases would comprise UK
government bonds. Some additional sterling non-financial
investment-grade corporate bonds would also be purchased.
"At its meeting ending on 25 March 2020, the MPC voted
unanimously to maintain Bank Rate at 0.1%. The Committee also
voted unanimously for the Bank of England to continue with the
programme of £200 billion of UK government bond and sterling
non-financial investment-grade corporate bond purchases,
financed by the issuance of central bank reserves, to take the
total stock of these purchases to £645 billion.
"The MPC will monitor closely the pass-through to banks and
building societies’ lending rates of the recent reductions in
Bank Rate.
"Regarding the impact of asset purchases, gilt yields fell
significantly following the previous week’s special MPC meeting
and the commencement of additional gilt purchase operations from
20 March. If needed, the MPC can expand asset purchases
further.
"The MPC will continue to monitor the situation closely and,
consistent with its remit, stands ready to respond further as
necessary to guard against an unwarranted tightening in
financial conditions, and support the economy."
(Reporting by UK bureau)