Bank of England to temporarily finance UK government spending

LONDON: The Bank of England has agreed temporarily to finance government borrowing in response to Covid-19 if funds cannot immediately be raised from debt markets, reviving a measure last used to any large degree during the 2008 financial crisis.

Britain’s government typically borrows money direct from markets through bond issuance, and this week financial markets showed a strong appetite to fund more than £10 billion of government bonds, some at record-low yields.

But markets were far choppier last month – before the BoE said it would buy £200 billion of assets, mostly bonds – and Thursday’s announcement gives the BoE scope to finance the government directly.

“As a temporary measure, this will provide a short-term source of additional liquidity to the government if needed to smooth its cashflows and support the orderly functioning of markets, through the period of disruption from Covid-19,” the BoE said in a joint statement with the finance ministry.

The government and BoE said any borrowing from the Ways and Means facility – effectively the government’s overdraft with the BoE – would be repaid by the end of the year.

“The government will continue to use the markets as its primary source of financing, and its response to Covid-19 will be fully funded by additional borrowing through normal debt management operations,” the statement said.

The facility currently has borrowing of 400 million pounds, and usage previously peaked at £19.9 billion in 2008.

BoE Governor Andrew Bailey has previously said that the BoE would not engage in ‘monetary financing’ – the permanent funding of government spending, linked to hyperinflation in post World War I Germany and more recently in Zimbabwe.

But Bailey defended the BoE’s existing quantitative easing as a means to keep inflation on target and said action to ensure smooth market functioning was also within the BoE’s remit.

The United Kingdom Debt Management Office is due to publish updated debt issuance plans on April 23.