Treasury extends its overdraft with Bank

THE Government has extended its overdraft with the Bank of England to finance its coronavirus spending spree.

The emergency funding deal will hand ministers more firepower as they battle the pandemic.

In a joint statement, the Treasury and the Bank of England said they were extending the so-called Ways and Means facility, which hit a high of £19.9bn in 2008 during the financial crisis but is usually around £400m.

They said use of the overdraft would be ‘temporary and short term’, and any money the Treasury draws from it ‘will be repaid as soon as possible before the end of the year’.

But the move could prove to be controversial if it is extended indefinitely. So-called ‘monetary financing’, when a country’s central bank hands money directly to the Government, can cause prices to rise uncontrollably as in Zimbabwe and Venezuela.

Bank of England governor Andrew Bailey vehemently denied last week that the central bank would use monetary financing to boost the economy.

The U-turn came as fresh data from the Office for National Statistics revealed the economy contracted by 0.1pc in February, even before the slowdown caused by the coronavirus outbreak began to bite.

Despite concerns which a shrinking economy and increased Government spending will prompt, analysts welcomed the extension of the Ways and Means facility.

James Smith, an economist at ING, said: ‘Assuming the overdraft proves to be a temporary stopgap as it was in 2008-2009, it should help money-market functioning.’