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UK is test case for joint economic action on virus
BRITAIN may once again become a model for fighting an economic slump more than a decade after setting the tone in the financial crisis.
The government is due to unveil its budget on Wednesday, a major fiscal set piece that's now likely to unleash some short-term stimulus to combat the novel coronavirus.
With the treasury and central bank stressing they are working together to craft a response, the stage is set for the coordinated policy action investors have been crying out for after the biggest market rout in more than a decade.
Traders are already pricing in a Bank of England interest-rate cut of as much as a half point this month, and the turmoil has led to increasing speculation among analysts and investors that move could come alongside the budget.
"The panic taking hold in markets also raises the chance of an early rate cut either on Wednesday, as part of a broader package of measures by UK policymakers, or even before then," said JPMorgan Chase & Co economist Allan Monks.
With markets in free-fall and anxious consumers stockpiling essential goods, pressure is mounting on authorities in the world's biggest economies to contain the crisis. A week after Group of Seven finance chiefs and central bankers pledged a coordinated response, the US Federal Reserve and the Bank of Canada are the only major central banks to cut interest rates.
As well as a spending boost to hospitals, firms and workers through the disruption, the UK Chancellor of the Exchequer Rishi Sunak may also announce other joint policies between the institutions, such as measures to help financing for small businesses.
The central bank may stay on the sidelines this week, keeping its powder dry for a scheduled Monetary Policy Committee meeting on March 26. The risk is that whatever is announced won't pack enough punch to calm the panic that has seen some British government bond yields go negative for the first time.
Mohamed El-Erian, chief economic adviser at Allianz SE, said in a Bloomberg Radio interview on Monday that the world must move fast into a "whatever-it-takes policy approach that is going to be both in central banks and government agencies".
The UK could be the petri dish for that theory. As the crisis has deepened, officials repeatedly stated the government and BOE would work in lockstep to respond to the threat. Incoming governor Andrew Bailey said last week he's had meetings with Mr Sunak.
"The Bank of England has made clear that they will take all necessary steps to protect financial and monetary stability," Prime Minister Boris Johnson's spokesman James Slack told reporters on Monday. "The government has also said that it stands ready to take further action as needed."
In the US, the emergency rate cut last week failed to stem market turmoil partly because it was perceived to be acting without a corresponding move from Donald Trump's administration.
"Central bank action is not enough, or even the most appropriate for dealing with the economic fallout from the virus," said Paul Hollingsworth, head of UK economics at BNP Paribas. "Alongside the 25 basis-point cut in bank rate that we expect in March, fiscal policy has a key role to play."
Mr Sunak said on Sunday that, as the front line in the battle against the virus, the National Health Service would receive the resources it needed. He also hinted that companies facing cash-flow problems would receive a break on their tax bills to help them "bridge through a difficult time".
Barclays economists said on Tuesday they expect the government to "deploy additional targeted measures to offset the negative impact of the virus outbreak on household revenues and corporate profits".
The bank said the BOE will relaunch a programme to encourage banks to lend and reversing a hike to the amount of capital banks must hold. It now expects a half-point cut in rates on March 26 at the latest, but finds "the case for an immediate cut very convincing".
Even before the virus outbreak, the UK economy was struggling to grow as the outlook for the nation outside the European Union appeared uncertain.
The crisis has come at a tricky time for both the Treasury and the BOE. The new finance minister only weeks into the job, and the central bank is handing the reins from Mark Carney to Mr Bailey. That becomes official on March 16. BLOOMBERG