© . Bank of England Plays Hard Cop in British Economy Role Switching (Bloomberg) — Just like after the 2008 crash, the two heavyweights of British economic policy play good cop-bad cop. Only this time they switched roles. In the years following the financial crisis, the Bank of England held on firmly to easy money, while fiscal stance became strict when Chancellor of the Exchequer George Osborne imposed significant austerity measures. But as the economy grapples with its highest level of inflation in three decades and the fallout from the war in Ukraine, BOE Governor Andrew Bailey is playing the bogeyman. The central bank, which is expected to raise interest rates for a third consecutive meeting on Thursday, is leading global peers with a rapid tightening of monetary policy. the need to curb borrowing – sustains more of its pandemic fiscal stimulus than most other developed countries and spends billions more to protect households against a rise in the cost of everyday goods and services. Significantly, as Ukraine’s conflict rages on, it is also the chancellor, not the BOE, who is increasingly being called upon to intervene to further support the economy. The shift between the policy heavyweights could come into sharper focus this month, when the BOE’s rate decision will be followed within days by Sunak’s spring statement, a fiscal update that resembles a mini-budget. The turnaround is part of a broader re-evaluation of how fiscal and monetary policy can best work to support economies, in the UK and beyond. “Now that we’ve been through this, there’s a real need for continued fiscal support,” said David Owen of Saltmarsh Economics. “Tax policy must be used quite proactively. The combination of that and a tightening of monetary policy seems perfectly logical to me. I’m all for it — it puts the UK in a good position internationally.” Simply put, during the pandemic, compared to the Great Recession, budget spending did more of the heavy lifting. Governments distributed more money. Economies recovered faster. And policymakers trying to manage the recovery are now facing a different set of problems – primarily inflation.The UK was one of the biggest covid spenders.According to UBS, the budget stimulus was matched only by the US, relative to the size of its economy. Sunak’s measures to maintain workers’ and businesses’ incomes cost about £370 billion ($484 billion) in total, including loans, with the BOE offering full support, cutting interest rates to nearly zero and buying up government debt to absorb the additional borrowing. The purchase of £440 billion in BOE bonds between March 2020 and December 2021 was enough to cover about 94% of the increase in net fin to offset the UK’s financing needs in the period. In the years following 2008, when the economy was slow to recover, the government quickly began arguing that reducing budget deficits and debt was the top priority. Osborne used the specter of bond market turmoil and debt crises in eurozone countries, such as Greece or Spain, to invoke the need for fiscal austerity. And he pointed to the low interest rates on the British government debt as proof that his plan worked. In retrospect, however, many economists are inclined to credit monetary policy for that achievement. In other words, if UK borrowing costs stayed low, it was because the BOE kept them that way. That argument was only strengthened when intervention by the European Central Bank — Mario Draghi’s famous “whatever it takes” — succeeded in lowering bond yields even in the most fiscally difficult euro area countries. “I never understood George Osborne’s mantra about the need to cut the deficit,” Owen said. “Covid has changed a lot of these things in this world we are in right now and I see no problem with rolling out more targeted measures.” As the pandemic fades, Sunak – like his Conservative Party predecessor Osborne – has also spoken about the need to get public finances back in order. He has actually gone above and beyond many finance ministers by raising taxes to pay for some of the pandemic spending. But that move has been accompanied by policies such as providing financial support to households to cope with higher energy bills and the sign of spending increases for every government department over the next three years. Now the Treasury is facing calls to expand spending to help businesses cope with a historic surge in energy prices following Russia’s invasion of Ukraine. Meanwhile, as inflation hits a 30-year high of 5.5% – with some expected to hit 10% later this year as a result of the crisis in Ukraine – it is the central bank that has slammed the brakes early and hard. stood. The BOE has already raised rates twice — before the US Federal Reserve even started tightening, for example — and announced a reduction in bond holdings. At some point, the chancellor himself may feel the sting of the BOE’s newfound hawkishness. If central bank policies helped keep government borrowing costs low after 2008, they are now having the opposite effect, as government bond yields rise in line with expected rate hikes. Should the BOE benchmark reach 2% this year, as the markets predict, the cost of amortizing bonds held under the BOE’s QE plan alone will rise to £17 billion a year, approximately double the level before officials set interest rates for the first time in December, according to Bloomberg’s calculations. ©2022 Bloomberg LP
