Call for Bank to provide clarity on flirtation with negative rates
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.”