Next Bank of England governor signals coordinated U.K. response to coronavirus

Bailey said he's already discussed how to ensure the "most effective coordination" between authorities with Chancellor of the Exchequer Rishi Sunak. The comments came as the government said next week's budget will reflect the economic impact of the outbreak.

The comments to a committee of U.K. lawmakers are Bailey's first to address the U.K. monetary policy outlook. They come amid mounting speculation that the BOE will follow the Federal Reserve in responding to the virus with an emergency interest-rate cut.

Bailey won't succeed Mark Carney as governor until March 16, but he indicated that he's not in favor of cutting before gathering more evidence. Still, he said, that "policy can always act in a timely manner."

Investors are pricing in about a 60% chance that officials will lower borrowing costs by 50 basis points to 0.25% this month. Economists at HSBC and Nomura said the move may come imminently.

Bailey told lawmakers that some collective action may be needed to offset the impact on supply chains, which could lead to companies hitting cashflow problems. He also highlighted the range of tools at the central bank's disposal and said it must be nimble in the face of the virus outbreak.

"We must act in a coordinated fashion," he said. "We can't let our notions of independence get in the way of us."

Bailey said he agreed with Carney's view that the BOE has about 250 basis points of policy space, and the lower bound on interest rates is about 0.1%.

Deutsche Bank economists said Wednesday that they expect "coordinated policy action" between the Treasury and BOE, with next week's budget likely to include a series of emergency measures to support businesses and households.

That would then be followed by a BOE rate cut, possibly on budget day to reinforce the idea of coordination, the economists said. There may also be "targeted measures to increase liquidity" including a new Term Funding Scheme and a lowering of the countercyclical capital buffer to 0%.

Bailey's comments on coordination are an acknowledgment of the serious threat from the outbreak, though they may raise concerns about the BOE's operational independence. Prime Minister Boris Johnson is widely seen to have tightened his grip on the Treasury after former Chancellor Sajid Javid quit last month over the power grab.

Bailey, however, said that the BOE's independence is not up for debate and is "preserved."

In a written questionnaire to lawmakers, Bailey said that the bank needs to "engage in a co-ordinated way domestically that does not compromise its independence."