In a historical move, the Bank of England announced this morning that it will begin to finance the short-term needs of the Treasury, in other words it will directly monetize the UK deficit, something central banks had - for the past decade - denied they do or would do.
The BOE move will allow the government to bypass the bond market entirely until the Covid-19 pandemic subsides, financing unexpected costs such as the job retention scheme where bills will fall due at the end of April. Ironically, as the FT notes, although BoE governor Andrew Bailey opposed monetary financing earlier this week, Treasury officials felt it was best to have the insurance of the central bank willing to finance its operations in the short term.
In a statement on Thursday, the government announced it would extend the size of the government’s bank account at the central bank, known historically as the “Ways and Means Facility”, which normally stands at just £370m. This will rise to an effectively unlimited amount, allowing ministers to spend more in the short term without having to tap the gilts market. In 2008, a similar move saw the facility rise briefly to only £20bn.
And so helicopter money has arrived, with the UK Treasury now taking de facto control of the central bank.
The Ways and Means facility had long been used as a financing means of government for day-to-day spending before the BoE would sell government bonds to the market, but by 2006, it had become an emergency fund with the financing of government undertaken by the Debt Management Office on a scheduled basis. Less than a month ago, the Bank of England said there was little chance there would be any need to use the facility, demonstrating just how much stress government finances have come under in the past few weeks.
In a call with journalists on March 18, Mr Bailey said the facility was just a “historical feature”.
"I don’t think at the moment we’re facing an inability of the gove...