BOE not keen on negative rates

CHIEF ECONOMIST

One of the Bank of England’s key policy-makers played down the possibility of an imminent cut in interest rates below zero, saying that “reviewing and doing are different things.”

Andy Haldane, the BOE’s chief economist who more than a week ago said officials were assessing negative rates, added Tuesday that policy-makers weren’t ruling any options out “as a matter of principle.”

“Currently we are in the review phase,” he said in an webinar Tuesday hosted by the Confederation of British Industry. His comments prompted traders to push back bets on negative rates to August of next year, compared with December 2020 last week.

The scale of the recession triggered by the coronavirus pandemic has fuelled a debate about the possibility that the U.K. could be the next advanced economy to introduce negative rates. BOE Governor Andrew Bailey told lawmakers last week that he has changed his view “a bit” on the subject but that the policy had received “pretty mixed reviews” elsewhere.

The BOE has already cut its benchmark rate twice this year to 0.1 per cent. Economists say taking it below zero is probably last on its list of preferred measures, with many predicting an increase in the central bank’s bond-buying program next month.

Haldane said that BOE would look at negative rates’ impact on the financial sector, where they would squeeze margins between lending and deposit rates, and how they would affect confidence in the economy.

The central bank could opt for a partial response by cutting the borrowing rate paid for by banks for loans taken out under its Term Funding Scheme, according to Allan Monks, an economist at JPMorgan. That could be similar to the ECB’s decision to ease the terms of its bank lending facilities.

Still, that probably won’t be the BOE’s next step, he said. “If the BOE were to introduce negative rates following a review, we think it would do it transparently via the policy rate,” Monks said. “It would be simpler to communicate, probably more effective, and would deliver banks with cheaper funding at the same time.”

Haldane also said economic output probably won’t bounce back as quickly as it plunged and may not return to pre-virus levels until the end of next year.

Prime Minister Boris Johnson said Monday England’s outdoor markets and car showrooms will be able to reopen from June 1. All other non-essential retail outlets will be expected to be able to reopen from June 15 if the government can control the spread of the virus.

“There will be, understandably, a period of prolonged caution in spending by both households and companies,” he said.