BOE’s Vlieghe Gives Strongest Backing Yet for Negative Rates


Bank of England policy maker Gertjan Vlieghe gave his strongest backing yet for the use of negative interest rates if the U.K. needs more stimulus, highlighting a growing schism between officials on the institution’s toolkit.

Two days after Deputy Governor Dave Ramsden said the BOE had scope for more quantitative easing to support the economy -- describing it as a “tried and tested tool” -- his colleague on the Monetary Policy Committee contended that there’s “little QE can do to add further stimulus to the economy.”

BOE’s Vlieghe Gives Strongest Backing Yet for Negative Rates

“Should market functioning deteriorate again, of course the MPC will not hesitate to accelerate the buying pace again, if that is appropriate,” Vlieghe said in a speech released on Friday that will be delivered to Durham University next week. “Absent such a deterioration, and with long-term interest rates already very low, we need to look for tools other than QE to deliver further stimulus if required.”

The remarks underscore a growing rift between BOE policy makers on the contingency they could resort to if the massive stimulus already deployed to the economy proves to be insufficient to drive a recovery from the pandemic crisis. While officials have agreed that negative interest rates could be used in theory, such a prospect is still months away.

Vlieghe zeroed in on the risk of labor market weakness, highlighted Thursday by fellow rate-setter Michael Saunders, saying that he favored negative rates to deal with such a threat. He added that if the economy evolves in line with this month’s projections, “no further monetary stimulus is required.”

Subzero Rates

“My preferred path for policy would be to keep the current monetary stimulus in place until well into 2023 or 2024,” Vlieghe said, adding that if labor market slack persists, “I would favor a negative Bank Rate as the tool to implement the stimulus.”

The speech also featured a graphic showing three scenarios for monetary policy for the coming years, including one where the benchmark falls to -0.75% -- the same level reached by the Swiss National Bank, which has the world’s lowest interest rate.

That raises the prospect that Vlieghe could hypothetically envisage the BOE reducing borrowing costs that far if it wanted to, if not further.

“It was also striking that he set out his own ‘Dot Plot’ for rates in different scenarios,” said Dan Hanson, an economist at Bloomberg Economics. “That’s one of the clearest indications yet of how low rates could go.”

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