The BoE's mission impossible - predicting the scale of a Covid-19 recession

The Bank of England (BoE) faces the nearly impossible task of putting numbers on the scale of the coronavirus recession next week, when it must also decide whether to expand its already huge 645 billion pound bond-buying programme.

First and foremost, the BoE is waiting for Prime Minister Boris Johnson to decide when and how to ease a lockdown that official budget forecasters say could push Britain's economy into a 13 percent collapse this year, its deepest in 300 years.

Governor Andrew Bailey and other BoE officials have said the forecasters' nightmarish scenario of a 35 percent plunge in gross domestic product between April and June is not implausible.

In March, as the crisis escalated, the BoE cut interest rates twice, to a new low of 0.1 percent, and bolstered its bond-buying by a record 200 billion pounds to 645 billion pounds ($802 billion) to help the government ramp up public spending.

Economists said they expect the BoE to refrain from further action on May 7, when it announces the outcome of its latest policy meeting.

Instead, Bailey and his colleagues will attempt to say how long the economy might take to bottom out, when it might start to recover and how much long-term damage it could suffer in the process as companies fire workers or go bust.

BoE officials have said a drawn-out recovery is more likely than a quick snap-back, raising the prospect of inflation far below their 2 percent target and more stimulus.

Bailey has said quarterly projections the BoE will publish on May 7 — the day the government is due to review its shutdown — will be an exercise in guesswork.

"Landing on what you might call a conventional central case is going to be really very hard to do," he said on April 17, adding that the BoE was likely to couch its best estimates with lots of risk scenarios.

A Reuters poll of economists last week predicted a 5 percent fall in British economic output in 2020.

Ross Walker, chief UK economist at NatWest Markets, said the BoE might be a bit more downbeat to underscore its message that it is ready to buy yet more bonds, key to keeping yields in debt markets down and avoiding further strain on the economy.

"It might help if they can signal that they don't think we are through the worst of this," Walker said.

The BoE is not alone in trying to make sense of the chaos wrought by the coronavirus shutdowns.

This week, the US Federal Reserve and the European Central Bank will also try to assess the duration of their lockdowns, how wary consumers will be about resuming their normal lives afterwards — and the risk of a second wave of the virus.

MORE BOND-BUYING?

Like its peers, the BoE has responded to the crisis by scaling up its bond-buying, helping Britain's government to fund a massive spending surge and cover a huge hole in tax revenues.

The government plans to sell 235 billion pounds ($293 billion) of bonds just between April and July, dwarfing a previous 156 billion pound target for the whole financial year.

The BoE looks set to use up its extra 200 billion pounds of bond-buying firepower by July, when Britain is likely still to be beset by the coronavirus crisis and could be facing renewed worries about the Dec. 31 end of its Brexit transition period.

RBC Capital Markets analysts said the BoE might feel it is too soon to raise its bond-buying as soon as next week's meeting because of the concerns — denied by the central bank — that its coronavirus crisis response amounts to a government bailout, which would put its independence at risk.

But the BoE is likely to increase its quantitative easing programme at its June 18 meeting, the RBC analysts said.

The BoE's Financial Policy Committee is due to give Britain's giant financial services sector an extra check-up with a report also due to be published on May 7.