Band of England Keeps Options on Negative Rates, Bailey Says
Band of England Keeps Options on Negative Rates, Bailey Says
(Bloomberg) -- The Bank of England is studying how low U.K. interest rates can be cut amid the coronavirus crisis and isn’t excluding the idea of taking borrowing costs below zero, according to Governor Andrew Bailey.
“Given what we’ve done in past few weeks, it should come as no surprise to learn that of course, we’re keeping the tools under active review in the current situation,” Bailey told lawmakers on Wednesday when asked about negative rates. “We do not rule things out as a matter of principle. That would be a foolish thing to do. That doesn’t mean we rule things in either.”
The comments come amid a growing debate about the possibility of negative interest rates in the U.K., which intensified Wednesday after a report showed inflation slowed to the lowest level since 2016 and the nation sold debt with a sub-zero yield for the first time. Bailey said his position on going below zero had changed since entering the pandemic, but the policy had received “pretty mixed reviews” elsewhere.
While officials have repeatedly emphasized such a move isn’t imminent, and would be tricky to implement in the U.K., they’ve also stressed nothing is off the table in their efforts to fight the impact of coronavirus. The fallout could push the economy into the deepest recession in three centuries.
Interest-rate swaps, which are used to gauge where the benchmark may be, are just below 0% for December, and get progressively lower in 2021.
Still, a full 10 basis-point cut below zero is yet to be fully priced in. That means that rather than outright bets on a negative rate, those moves might represent traders hedging against the prospect of a worsening economic situation making easier policy more likely.
“In investors’ minds even a small probability of negative interest rates in the dollar and pound is a big change”, said Antoine Bouvet, rates strategist at ING Groep NV. “That the possibility remains open, even if small, and might cause some investors to pre-hedge.”
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Bailey said the BOE was keen to observe the impact of its previous U.K. rate cuts, bearing in mind arguments that they become less effective the closer to zero they are. It’s also examining the experience of other central banks that have cut below zero, he said, adding the financial system in an economy is an important factor.
The governor has previously expressed a stronger opposition than other policy makers to the tool, saying they would present a communications challenge and prove difficult for banks. Others have been more sanguine, with Silvana Tenreyro saying they’ve had a positive effect elsewhere and Chief Economist Andy Haldane noting they were something officials were examining among other unconventional tools.
Cutting interest rates below zero is the last policy option that BOE officials would currently choose to further stimulate the economy, according to Barclays, which sees more asset purchases as the most likely next step.
What Our Economists Say:
“Would negative rates really be a game changer if the economy needed a lift? Probably not. The reality is the BOE is at the limits of its powers to boost spending. If demand did need a lift further down the line, we think a more potent policy mix would be for the BOE to continue with QE while fiscal policy does the heavy lifting.”
-- Dan Hanson, U.K. economist
Another side effect would be to further weaken an already beleaguered pound, making imports more expensive. While exports would typically get a boost, the impact of the pandemic on trade means that’s less likely this time.
“I can’t think of an economy where negative rates are a worse idea than the U.K.,” wrote Kit Juckes, a strategist at Societe Generale. “How on earth does it make sense to even consider adding negative rates to the mix?”
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