Bank signals its next move may be negative interest rates
THE Bank of England has taken another step towards negative rates amid rising Covid infections and a looming unemployment crisis.
The Monetary Policy Committee unanimously voted to hold interest rates at the record low of 0.1 per cent but minutes of its meeting, released yesterday, said it had been briefed on the Bank’s plans “to explore how a negative Bank Rate could be implemented effectively, should the outlook for inflation and output warrant it”.
Central banks including the Bank of Japan, the Swiss National Bank and the European Central Bank have already taken rates below zero, although these have only applied to companies.
It is likely the Bank of England would do the same to stop firms hoarding cash but also to ensure people did not have to pay banks for the privilege of holding their savings.
The Bank has been reviewing its ammunition to tackle the coronavirus crisis since the summer but expressed concerns over the potential counterproductive impact on credit provision if lenders’ profits were damaged.
Financial markets – already pricing a move into negative territory as economic prospects darken – are forecasting a cut to minus 0.1pc by mid-2021.
Allan Monks, a JP Morgan economist, said: “The more it talks about this option the more it looks as if it has all but made up its mind.”
The UK economy is still 11.7pc below pre-covid levels and Threadneedle Street warned: “The recent increases in Covid-19 cases have the potential to weigh further on economic activity, albeit probably on a lesser scale than earlier in the year.”
It has forecast unemployment peaking at 7.5 per cent in the wake of the crisis, which could mean a rise of more than a million in the jobless total. Figures showed the first signs of a rise in joblessness this week. More than 2.7 million people are on Universal Credit.
The winding up of the Government’s furlough scheme at the end of October also threatens the labour market, with an estimated 10 per cent of the workforce still on it, according to the ONS.
Policymakers could also have to deal with a transition to no-deal trading with the European Union if talks collapse.
Robert Wood, UK economist at Bank of America Merrill Lynch, said there was a major risk that the Bank could cut rates in November. And he added: “In a no-deal Brexit scenario we expect Bank Rate cut to minus 0.5pc in 2021.”
However, George Buckley, chief economist at Nomura, questioned if going into negative territory would be effective, asking: “Is a 20 basis point cut realistically going to address the scale of the crisis that we are seeing?”