Bailey Plays Down Odds of BOE Negative Rates on Virus Risks

(Bloomberg) -- The Bank of England isn’t close to negative interest rates despite the resurgence of the coronavirus reinforcing downside risks to the U.K. economy, according to Governor Andrew Bailey.

While the bank has “looked hard” at rate cuts and negative rates are in the toolbox, planned technical work on the policy is to examine whether it can be implemented rather than a signal it is coming, he said.

“It’s in the toolbag but it doesn’t imply anything about the probability of us using negative interest rates at the moment,” Bailey said.

In his view, it would be “intolerable” to be in a situation where policy makers agree on headroom but “don’t know whether we can actually do it. That’s intolerable. So nobody should read more than that really into it, that that’s the next stage of the work.”

The pound pared most of its earlier decline on that comment, which punctured speculation officials were moving nearer to the controversial policy. Last week, minutes of the BOE’s September meeting showed officials were planning structured talks with banks on the viability of sub-zero rates.

Bailey said Tuesday those talks would take time, a signal that a move below zero isn’t imminent. Investors pushed back bets on a rate cut to May from March.

Bailey spoke in a webinar shortly after the government urged people to work from home again if possible, reversing its drive to get employees back into workplaces. Later Tuesday, Prime Minister Boris Johnson announced a fresh wave of restrictions to help control the coranavirus, which he said are likely to last six months and could be tightened further if needed.

That’s left the U.K. heading into the final few months of 2020 facing renewed economic pain from virus restrictions, a possible spike in unemployment as wage-support programs end, and a potentially messy Brexit at the end of the year.

Policy makers are already predicted to expand their bond-buying plan in November. Bailey said that the economy remains 7-10% smaller than it was before the crisis, and the “hard yards” remain ahead.

The recovery has been rapid so far and slightly better than expected in the third quarter, but it has been “very uneven” and unemployment is probably higher than reported.

Bailey also reiterated guidance that officials will need strong evidence of a recovery before they think about tightening policy.

“We need a lot of confidence in a world of uncertainty and change that the economy really is heading back on track,” he said.

Shutdown Hit

The BOE’s current economic projections, which see a recovery to pre-crisis levels next year, are based on an easing of virus uncertainty and avoiding a nationwide lockdown. Johnson said hospitality venues across England will have to close by 10 p.m. from Thursday and will be limited to table service only as ministers clamp down on socializing. Some lawmakers have called for more severe measures, included a short lockdown.

The measures will hit the economy, and may also worsen an expected jump in unemployment when government support programs expire next month. Bailey said labor demand is currently weak, and, in one sign of the challenges ahead, U.K. hotel operator Whitbread Plc said Tuesday it plans to cut as many as 6,000 jobs.

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