Newly appointed UK Chancellor of the Exchequer Rishi Sunak tore up the fiscal rulebook and unveiled a spend-heavy UK budget, announced just after the Bank of England delivered an emergency interest-rate cut. Our David Zahn, Head of European Fixed Income, weighs in, noting that the UK government is one of the first to provide a coordinated fiscal and monetary policy response to battle the economic impact of the coronavirus.
It appears UK policymakers will do whatever it takes to battle the economic impacts of the coronavirus, unveiling the biggest fiscal stimulus in decades combined with monetary policy easing, both announced on the same day.
The first UK budget from Prime Minister Boris Johnson’s government revealed much more of a fiscal expansion than what we’ve come to expect in the past, unveiling a £30 billion spending package with special funds earmarked to mitigate the impacts of the coronavirus on the economy.
Rishi Sunak, who was only appointed chancellor last month, has torn up the fiscal rulebook that his predecessor Sajid Javid agreed to with Johnson. This included pledges to use revenues to cover day-to-day expenditure, lower public debt and limit public sector net investment to 3% of gross domestic product (GDP).
In our view, now seems like the right time to move away from a balanced budget. The United Kingdom is one of the first few governments to have the opportunity to give a fiscal response to Covid-19. Given the current uncertainty, ongoing Brexit negotiations with the European Union (EU) and where sovereign yield levels are at the moment (some being in negative territory), we think markets will be much more open to the spending program than perhaps they would be in different circumstances.
That said, we’ve seen a coordinated approach by the UK government and the Bank of England (BOE), in the hope that simultaneous monetary and fiscal easing could make a greater impact on supporting the economy through the Covid-19 coronavirus. On the morning of the UK Budget announcement (March 11), the BOE made an emergency interest-rate cut of 50 basis points—putting the target rate at 0.25%—and announced a lending scheme for small- and medium-sized enterprises (SMEs).
Bond markets should like this combined policy approach, and rallied on the back of this BOE move. In our view, this demonstrates that the BOE is ready to act, and will likely be creative in its approach. We anticipate easy monetary policy in the United Kingdom will be with us for the foreseeable future. With incoming BOE Governor Andrew Bailey set to lead the next monetary policy meeting on March 26, we’ll keep our eyes peeled for any further monetary easing.