BOE Should Buy U.K. Debt Directly From Government, Former Official Says


© Bloomberg. A commuter scoots past the of England in the City of London on March 24. Photographer: Jason Alden/Bloomberg

(Bloomberg) — The Bank of England should take the step, unprecedented in the modern era, of buying bonds directly from the government, according to a former deputy governor of the central bank.

Charles Bean, now a member of the Office for Budget Responsibility, said the private sector may struggle to take up all the additional debt sales needed to protect the economy from the shock.

The proposal amounts to monetary financing, or the central bank printing money to support governments, and has historically been seen as a road to hyperinflation. Bean said that need not happen this time, provided the holdings should be unwound promptly once the Covid-19 crisis has passed.

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“Similar episodes in the past –- for instance, under the Weimar Republic a hundred years ago or Zimbabwe in the late 1990s –- have invariably been associated with fundamental underlying political and structural problems,” he wrote in a blog post. “That would not be the case today.”

The suggestion also reflects how central across advanced economies are running out of policy space to cushion the blow from the pandemic after years of ultra-low and unconventional measures such as quantitative easing. Some economists have also suggested that central banks should hand out money to citizens directly, a measure known as helicopter money.

Rising deficit

Bean said the U.K. budget deficit in the coming fiscal year could “easily” exceed 200 billion pounds ($248 billion), adding to the deluge of bond sales that was already required before the pandemic led to the effective shutdown of the economy. In April alone, the U.K will sell 45 billion pounds of gilts, more than double a previous estimate for around 20 billion pounds.

“That is a lot for financial institutions to absorb,” Bean wrote, describing the potential deficit level as “not unreasonable.”

“In such circumstances, however, it would –- in my view -– be entirely appropriate for the Bank of England to help out by buying some of them -– directly from the government in the primary market, should that prove necessary.”

The BOE, which cut interest rates twice this month and expanded its asset-purchase program by 200 billion pounds in response to the coranavirus outbreak, already buys gilts in the secondary market.

When they launched their latest buying this month, BOE officials said they would keep the case for participating in the primary market “under review.” They said the same when they last expanded the plan in 2016.

(Updates with a quote from Bean in seventh paragraph.)

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