The UK’s central bank has agreed to temporarily lend the UK government money via its Bank of England overdraft facility if required to help finance its massive COVID-19 spending plans.

This agreement revives a measure used during the 2008 financial crisis when the previous high of £19.9 billion for use of the overdraft account was reached.

On April 1, the UK Treasury said it will seek to borrow a monthly record of £45 billion in April — by selling UK government debt securities (bonds) to institutional investors — to help fund its support of the UK economy during the coronavirus crisis.

“HM Treasury and the Bank of England have agreed to extend temporarily the use of the government’s long-established Ways and Means (W&M) facility,” said the UK Treasury in a statement.

The W&M facility is the government’s pre-existing overdraft at the Bank of England, which is the UK’s central bank.

Ordinarily, a standing balance of around £0.4 billion is maintained to support Exchequer cash management. As of April 8, 2020, drawings under the W&M facility remained at £0.4 billion. 

“As a temporary measure, this will provide a short-term source of additional liquidity to the government if needed to smooth its cashflows and support the orderly functioning of markets, through the period of disruption from Covid-19.

“The government will continue to use the markets as its primary source of financing, and its response to Covid-19 will be fully funded by additional borrowing through normal debt management operations. 

“Any use of the W&M facility will be temporary and short-term. 

“As well as temporarily smoothing government cash flows, the W&M facility supports market function by minimising the immediate impact of raising additional funding in gilt and sterling money markets.

“The W&M facility is the government’s pre-existing overdraft at the Bank. 

“Any drawings will be repaid as soon as possible before the end of the year. 

“HM Treasury, the Debt Management Office and the Bank will continue to cooperate closely to support the orderly functioning of the gilt and sterling money markets.”

Reuters reported that the UK is due to publish updated debt issuance plans on April 23, and some economists predict the UK’s budget deficit this year could exceed 10% of GDP, its highest since World War Two. 

Market strategists at Citi said the UK government may need to sell a record £285 billion of bonds this year, almost double what the DMO sold last year.