Britain Hasn't Failed the Moral Hazard Test
For monetary purists, it’s a terrible thing for a central bank to fund state spending, but rules are being suspended everywhere during this crisis.
Walking in lockstep.
Photographer: WPA Pool/Getty Images EuropeAndrew Bailey, the new Bank of England governor, was at pains in an FT interview on Sunday to draw a clear distinction between the BOE’s bulk buying of bonds and its direct financing of the British government’s coronavirus spending plans. The latter simply wasn’t going to happen, he said, because it would damage the central bank’s credibility in pursuing its defining mission of controlling inflation.
So it’s embarrassing for Bailey that the line between the BOE and the U.K. Treasury got a little more blurred on Thursday, with the announcement of a temporary extension to the government’s overdraft at the BOE. While this is more of an insurance policy than a signal that the bank is immediately about to start printing money to let Boris Johnson’s administration run up a bigger deficit, the move would still allow the Treasury to avoid having to brave the bond markets if it decided that were necessary. This facility rose to almost 20 billion pounds ($25 billion) during the financial crisis, though that could easily be exceeded this time.