Call for Bank to pro­vide clar­ity on flir­ta­tion with neg­a­tive rates

The Daily Telegraph - Business - - Business - By Russell Lynch and Lizzy Bur­den

THE Bank of Eng­land is un­der pres­sure to open up about its con­tro­ver­sial flir­ta­tion with neg­a­tive in­ter­est rates as mar­kets cut the odds on a dip be­low zero next year.

City econ­o­mists said the Bank’s mon­e­tary pol­icy re­port this week should set out Thread­nee­dle Street’s ini­tial ver­dict on a pol­icy tool al­ready used for years by ma­jor in­sti­tu­tions in­clud­ing the Euro­pean Cen­tral Bank, the Bank of Ja­pan and the Swiss Na­tional Bank. An­drew Bai­ley, the Bank’s Gov­er­nor, has said the pol­icy is un­der “ac­tive re­view” as he weighs up am­mu­ni­tion to fight off the eco­nomic dam­age wrought by the Covid-19 pan­demic.

Peter Dixon, UK econ­o­mist at Com­merzbank, said: “I’m hop­ing that the Bank will give us a bit more steer on what their think­ing is. They raised the prospect and then went very quiet about it. I don’t think they can bat this one into the long grass for­ever.”

UK pol­i­cy­mak­ers have pre­vi­ously been re­luc­tant to turn to neg­a­tive rates due to con­cerns such as the im­pact on bank prof­its and po­ten­tially im­pair­ing lend­ing growth. Other is­sues in­clude cash hoard­ing and the dif­fi­cul­ties of ex­plain­ing the pol­icy to the public. But fi­nan­cial mar­kets are still bet­ting that the Mon­e­tary Pol­icy Com­mit­tee will take in­ter­est rates, which have been at a record low of 0.1pc since March, be­low the zero lower bound in 2021.

Philip Shaw, econ­o­mist at In­vestec, said in­ter­est rate mar­kets were pric­ing in a 60pc chance of a quar­ter-point cut to mi­nus 0.15pc by June next year, ris­ing to an 80pc chance by early 2022.

The prospect of a jobs catas­tro­phe when the Gov­ern­ment’s fur­lough scheme ends in the au­tumn has fo­cused the Bank’s think­ing on fur­ther stim­u­lus mea­sures, with the Of­fice for Bud­get Re­spon­si­bil­ity pre­dict­ing un­em­ploy­ment of 3.5m.

A new CBI sur­vey shows 67pc of com­pa­nies are now “fully op­er­a­tional” but the big­gest con­cern by far for 68pc is a lack of de­mand as the econ­omy re­opens.

Lord King, a for­mer gov­er­nor and long-time critic of neg­a­tive rates, told broad­caster Econ Films’ Coron­aNomics show that the “ef­fec­tive­ness of very low in­ter­est rates has run its course”. He said: “At this stage, I still think it’s pre­ma­ture to ar­gue that a big mon­e­tary stim­u­lus is ap­pro­pri­ate be­cause we still have sig­nif­i­cant as­pects of a shut­down.

“We have to wait un­til we get to a point where it looks as if the econ­omy has re­cov­ered to within a few per­cent­age points of the level that it had reached at the very end of last year be­fore re­ally feel­ing that we can end the tem­po­rary sup­port schemes – and think in terms of con­ven­tional mon­e­tary and fis­cal stim­u­lus. I still think that is some way off.”

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