Mark Carney, the outgoing governor of the Bank of England, outlined plans yesterday to help businesses in the event of a major outbreak of coronavirus.
Carney, who will step down as governor on 15 March, told MPs on the Treasury select committee that the economic effects of Covid-19 could last up to six months and that there would be disruption, not destruction, to the UK economy.
He said: “The Bank of England’s role is to help UK business and households manage through an economic shock that could prove large, but will ultimately be temporary”
He said that the hit to the economy is expected to come largely through the disruption of supply chains for companies that import and export and through staff absences affecting business productivity and output.
According to the government’s blueprint for managing the outbreak, up to one-fifth of the UK workforce could be absent during the “peak weeks” of the outbreak.
SME funding shortfall
Carney recognised that the virus could have effects on business confidence, on company cash flows and on the availability of finance.
As such, he said the BoE would be prepared to cut interest rates and allow banks to use “rainy day” funds to meet the needs businesses. The BoE’s monetary policy committee is scheduled to meet again at the end of March.
To address the issue of a funding shortfall, Carney said the BoE may be prepared to relax the rules that govern how much capital banks can draw down in times of economic hardship (“the countercyclical buffer”).
Pundits in the UK business press have speculated that the BoE in concert with the government, in a coordinated fiscal monetary response, could be done through by easing the capital requirements on commercial banks to allow them to expand their balance sheets quickly, or through loan guarantees targetting SMEs needing funds at short notice.
US & G7 outlook
In related news, the US central bank yesterday moved to cut interest rates yesterday during an unscheduled meeting of its monetary policy group, cutting rates by 50 basis points due to the “evolving risks to economic activity”, the Federal Reserve said.
Meanwhile, finance ministers and central bankers of the G7 Group of nations pledged yesterday to “use all appropriate policy tools” to manage the effects of the epidemic. The group, which comprises of representatives from Canada, France, Germany, Italy, Japan, the UK and the US, said the economic impact could tip the group into recession.