• Joel

UK gets HUGE Coordinated Monetary & Fiscal Easing Package

Today the UK became the first major economy to deliver a coordinated monetary and fiscal response to the Covid-19 outbreak.

As Ken noted in his earlier blog, the Bank of England this morning unleashed its very own “bazooka” of policy measures including; a 50bps rate cut, a new Term Funding Scheme for small businesses (it was noted that experience from the Term Funding Scheme launched in 2016 suggests that in excess of £100bln could be injected) and a reduction to the countercyclical buffer to 0.0% from 1.0% (this was originally supposed to reach 2.0% by December). This final measure in itself will reportedly release support of up to £190bln for businesses.

Around midday, it was the UK governments chance to get in on the act.

Chancellor or the Exchequer Sunak unveiled a hefty £30bln package of fiscal stimulus to be injected into the UK economy this year, including; £7bln in direct Covid-19 measures, £5bln for the NHS and a further £18bln in more general stimulus.

Sunak added that he would do whatever it takes to support the economy and noted that it is highly likely that the economy would soon face disruption, which will temporarily hit productivity.

Sunak noted that the government had been working alongside the BoE, and the two had wanted to coordinate their easing policy. Therefore, the UK is the first major G7 country to do so.

In terms of the government’s specific plan to tackle Covid-19, Sunak noted that;

- Whatever the NHS needs will be provided.

- Statutory sick pay will be made available for all of those who are advised to self-isolate and the government will refund the cost of statutory sick pay for up to 14 days to small and medium-sized businesses at a cost of £2bln.

- The government will make it easier to access benefits, which will be made more generous - the minimum income floor in universal credit will be removed. Moreover, a £500mln hardship fund will be unveiled to support the vulnerable.

- Finally, businesses will also be supported with a range of tax cuts, specifically aimed at helping small businesses in hardest hit sectors.

GBP was unreactive to the budget at the time. Indeed, after the Bank of England this morning axed rates in emergency fashion, it appears that expectations had risen for an even more drastic move by the government than what we ended up getting.

With expectations for more easing from the world’s major central banks growing, it looks like most of the major central banks look set to hit their lower bound on interest rates soon (the interest rate at which they cannot go any lower). What that means for FX markets is that the central bank divergence play might soon be reaching its expiry date.

So if it does come down to who was able to put together the most convincing fiscal and monetary response to Covid-19, the UK looks to be ahead! Whether that can yet be seen as a GBP positive is yet to be seen; after all, GBP isn’t exactly performing well today after the BoE’s cut and fiscal stimulus package.

Markets will now be asking the question; who else can replicate what has just been achieved in the UK? Will the ECB unveil another bazooka tomorrow that is quickly complimented by Eurozone fiscal stimulus? German Chancellor Merkal today hinted that the German’s could look at axing their “no new debt” rule. But the various EU nations continue to bicker over what such stimulus would look like.

What about the US? Markets are no longer buying into Trump’s promise of imminent fiscal stimulus, rather, such policies appear to be only in the conception phase, and would have to get past a Democratic Majority in the House. The Democrats will want more of a help for the poor/vulnerable fiscal response, while the White House is going more for a “tax cutty” response. Fighting over this will likely prolong the process. All the while, the Fed will likely hit 0% and have to restart QE – so much for coordination!


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