Britain faces a double-dip recession, and the Bank of England will be called upon to help the nation through it.
But they have a problem. Policymakers have already done a lot, so it is getting tricky to work out how to offer more support.
Interest rates are at a record low of 0.1pc. The Monetary Policy Committee (MPC) unleashed a huge wave of quantitative easing earlier in the year, creating £200bn in March and £100bn in June, to stave off a crunch in financial markets and support the recovery.
The Bank can do more. Inflation is still well below the MPC’s 2pc target, so they are free to focus on boosting growth and employment.
But it is not that straightforward.
Doubts are growing about the effectiveness of these policies, and it could be that the Bank is nearing the limits of its powers.
Economists expect another £75bn to £100bn of QE this week, potentially followed by taking interest rates below zero in 2021.
Economists at HSBC suspect this will be of limited use, partly because there are diminishing marginal returns to each new tranche of asset purchases.
“Already we see evidence that the impact of QE is fading and further asset purchases could even be counterproductive,” warns HSBC’s Daniela Russell.
Partly this is because buying up a large share of Government bonds in circulation makes it hard for the market to function. Purchases being made already will take the Bank’s stock of assets purchased under QE to £745bn, which is well over one-third of the total stock of the national debt, so a new round could take it to £850bn.
Another problem is that QE works by creating central bank reserves and using them to buy bonds held by banks. The risk is that this limits banks’ room to lend to the private sector.
“For now, banks’ balance sheets have swollen due to a flood of deposits as a result of the rise in precautionary saving,” says Russell, enabling banks to fund QE.
“As unemployment rises and furlough schemes are tapered, savings may be drawn down. This may well force banks to ration their balance sheets once again, limiting the scope for the Bank of England to conduct further large-scale QE.”
This is not the official view of the Bank of England yet, though Gertjan Vlieghe, a policymaker on the MPC, last month warned “QE is probably less potent now than in March”.
This does not mean QE is useless. Rishi Sunak’s budget deficit is expected to surge to well over £400bn this year, so it is useful to have a big buyer of Government bonds in the market.
In the first lockdown the Bank of England was buying bonds almost precisely as fast as the Treasury issued them, although they are bought from investors rather than directly from the Government.
Still, if QE is less useful to the Bank of England now than it was in March, it will need to look around for other tools.
HSBC notes yield control - holding down long-term borrowing costs - could be an option.
So are negative interest rates.
Until recently, the Bank thought its base rate could not go below 0.25pc without causing more harm than good. But that assessment keeps changing, and earlier this year it cut to 0.1pc.
Now officials are assessing the practical obstacles to cutting below zero, following in the footsteps of several central banks on the continent which have gone negative.
This assessment, which includes an examination of banks’ IT systems to make sure they can handle numbers below zero, is still ongoing, so it is not likely that the MPC will take the plunge this month.
But economists and financial markets think it increasingly likely the Bank could do so early next year.
Yet it is not clear a cut from 0.1pc to, say, minus 0.15pc would have the same effect as a ‘normal’ cut in positive territory of the same magnitude, for instance going from 0.5pc to 0.25pc.
Economists at Deutsche Bank note that already banks are not passing on the full benefit of rate cuts to borrowers.
In particular, rates for mortgage borrowers with small deposits are rising as banks fear growing risks in the housing market.
“Any rate cuts, we think, will largely be absorbed by lenders, as was the case back in March,” says Sanjay Raja.
Banks are also tightening up the availability of credit, he says. Businesses and households will struggle to benefit from lower interest rates if they cannot access a loan at all.
He suggests the Bank of England cut fees on the term funding scheme, under which the Bank of England pumps cheap funds into banks to encourage more lending and keep borrowing costs down. This could be more powerful than cutting rates.
But it may be that the Bank is simply nearing the limits of its powers.
People in urgent need of lower borrowing costs are getting some help from other sources, whether it is Government guarantees on business loans, or an extended repayments holiday on mortgages.
Those are intended to stave off calamity for those in the most dire straits, rather than encourage new growth.
Fundamentally, the economy’s problems are not ones that can be solved through monetary policy.
Lower interest rates might soften the blow for businesses and families in some circumstances, but ultimately a cheaper mortgage will not help a borrower buy a pint in a pub which has been ordered to close, or get a trim in a hairdresser’s that is shut.
Those service industries are going to suffer, whatever the Bank of England chooses to do on Thursday.