Bank of England Governor Mark Carney has warned that the coronavirus could have a "large" but "ultimately temporary" economic impact on the British economy lasting one or two quarters.
Stock markets rose following the remarks, with the FTSE 100 index of leading shares up 2.2% in mid-morning trading and the FTSE 250 index up by 2.76%. Carney said the lines of communications between the world's biggest central banks "are wide open" over the virus issue.
In his last appearance as governor before the House of Commons' Treasury Select Committee, he told MPs that in the near term the effect was likely to be felt more as a demand issue rather than a supply issue. He said this was a "consideration for the stance of monetary policy" which could suggest the BoE might consider a rate cut to boost confidence.
'Room for maneuver'
Current interest rates are 0.75% but Carney said that, when further asset purchases, or quantitative easing, was taken into account, the BoE had more room for maneuver.
"We have effectively 200 to 250 basis points of space," he said. He also said the BoE's view was that negative interest rates were not appropriate.
Deputy Governor Dave Ramsden told MPs that "you get more bang for your buck" when such measures are put together as a package.
Carney noted that, in the past, the BoE had looked at allowing banks to release the countercyclical buffer, their so-called rainy day fund of capital built up when credit is growing, in order to encourage them to lend to businesses.
"We would want banks to be able to use their balance sheets to support their customers; we are looking at those types of facilities and looking at things to support SME lending," he said.
A new phase
Carney said the virus had gone beyond the containment phase and said the economic effects could last up to six months, but that the BoE was ready to help customers and businesses.
He said the BoE's monetary policy committee was in the process of changing its assessment ahead of its forecast due on March 26.
"The impact of the virus is potentially large — it has spread beyond China, it is beyond the containment phase to the delay phase in a number of jurisdictions," he said.
Its impact will be measured over at least a quarter, perhaps two quarters, Carney said.
"The U.K. has one of the most open economies in the world and will be affected as a consequence," he said. "But it is different from 2008 because the financial system is now part of the solution, not part of the problem. U.K. households have worked hard since 2008 to pay down debt — that provides an additional buffer and the policy response has to be not to make them draw down on those buffers. The prospect is that we will have disruption not destruction this time."
Supply disruption
Carney said the BoE would assess economic impacts from the virus including effects on cash flow and promised to address any possible financial constraints to U.K. businesses and households that would emerge. It was also assessing the effects of banks' setting up split teams, to minimize contagion, as well as remote working for staff.
"It is clear in this situation that there will be elements of supply disruption but not a permanent impairment of supply," Carney said. "There are things we can do in order to ensure that those bank balance sheets that have considerable capital strength are used as effectively as possible."
Carney, who will step down as governor to be replaced by Andrew Bailey later this month, said the BoE's stress tests provided crucial information on how banks would cope with the virus, even though the effect of a pandemic had not been included in the tests.
"It is hugely important that we apply a variety of stress tests so we are not protecting against one type of stress and it is important that we remain humble with respect to future crises," he said.
"We didn't run a stress test against the specific situation of the virus but we can learn from the stress tests since 2014 about the type of situation we could get around the virus. We have run situations looking at severe slowdown in China, in Hong Kong — where a number of our banks have exposure — where shock propagates through the global economy with severe falls in asset prices of 50% to two-thirds," said Carney.
The governor said he was in close contact with the Treasury and the Chancellor of the Exchequer with a shared commitment to support the economy through a potentially challenging period.