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BOE's toolkit may include a bond-buying policy made in Japan


UK investors are looking east to work out what more the Bank of England may do to help support the country's coronavirus-addled economy.

While the central bank is widely anticipated to focus on expanding its quantitative-easing programme on Thursday, speculation is building that it will impose yield-curve control - a policy pioneered by the Bank of Japan - in the coming months.

The aim would be to target specific levels in its buying of government bonds, stifling increases in borrowing costs. That would help the government finance its massive support package to revive economic growth at a low cost for a long time.

For traders, the key would be which bonds the BOE decides to peg and at what level. Existential questions surrounding the future of trading the securities would emerge, especially if their scope for movement is limited. In Japan, there have been days where not a single government bond traded at all.

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The success of the policy in Japan is debated among economists, with the country still battling anaemic growth and inflation, even before the coronavirus pandemic. Nevertheless, the BOE under Governor Andrew Bailey is running out of conventional tools and is exploring the possibility of negative-interest rates - a policy adopted by the BOJ and the European Central Bank.

"Yield-curve control is more likely than negative rates in the UK," said Adam Dent, a UK rates strategist at Banco Santander SA. "It is a reasonable and effective policy, and the new BOE under Bailey may well be open to more radical changes to policy tools than before."

The growing clamour that more stimulus may be needed comes after the UK economy shrank a record 20.4 per cent in April, with the contraction over the last two months wiping out almost 18 years of growth. UK jobless claims more than doubled to almost three million, according to data released Tuesday. But the UK isn’t the only central bank that may adopt yield-curve control.

Market watchers expect the US Federal Reserve to bring in a similar measure later this year, with chairman Jerome Powell indicating last week that interest rates were unlikely to climb any time soon. The ECB has acknowledged the importance of keeping borrowing costs low across all bond maturities, without committing 
to an explicit yield curve control policy.

“If you have to think about what’s the most likely central bank to go down the route of yield-curve control, is it the BOE or the ECB, it’s got to be the BOE,” said George Buckley, an economist at Nomura International Plc. “There’s a lot of risks around negative rates.”

The negative rates option could harm banks’ profitability, and no country that has implemented the policy has managed to lift rates above 0 per cent. In addition, yield-curve control may also prove to be more cost effective for the BOE than continually boosting its bond-buying programme, which currently stands at £645 billion (S$1.13 billion).

Right now, UK bond yields are already hovering close to their lowest levels in history. The rate on benchmark 10-year gilts is at around 0.22 per cent, while those on two-year securities are below 0 per cent.

Yield-curve control has also been discussed by a think tank in vogue with UK Prime Minister Boris Johnson’s Conservative Party. The Policy Exchange issued a report this month recommending targeting the 10-year yield, in an effort to lower the cost of the debt stockpile. It highlighted that the UK has a longer average maturity than most of its peers at around 15 years.

Meanwhile, the national financial sector regulator said on Tuesday British banks need to accelerate preparations for dealing with businesses unable to repay money borrowed to bridge the coronavirus pandemic.

Over 800,000 businesses have taken out state-backed loans worth around £34 billion under schemes introduced by the government as lockdowns forced companies to shutter temporarily.

Financial Conduct Authority (FCA) Chair Charles Randell said some of the debt incurred will turn out to be unaffordable and will need to be tackled fast to avoid dragging on recovery.

“Lenders will need to scale their arrears-handling functions quickly, and invest in training and controls,” he told an online meeting with the chairs of Britain’s banks.

“There needs to be an appropriate dispute resolution system, and we are working with the Financial Ombudsman Service and the Business Banking Resolution Service to ensure that there is capacity to deal with the volumes we may see.” BLOOMBERG, REUTERS

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