BOE Officials Signal Openness to Negative Rates as Stimulus Tool

(Bloomberg) -- Two Bank of England policy makers indicated they were open to using negative interest rates if the U.K. needs more monetary stimulus at some point in the future.

The BOE has never cut interest rates below zero before, but is reviewing that option to see if it’s possible. Monetary Policy Committee member Michael Saunders said Friday there’s some room to cut rates as part of a range of tools. His colleague Silvana Tenreyro said the evidence from elsewhere is “supportive” of their use.

The comments revive the debate about sub-zero rates in the U.K., where the economy is struggling under restrictions to curb the coronavirus and uncertainty over the future trading relationship with the European Union. The central bank has already cut interest rates to 0.1% and has relied on asset purchases to keep borrowing costs low.

Saunders said that bond buying by itself may not be effective stimulus and a package may be a better option. In November, the BOE expanded its asset purchase program again, but left the key rate unchanged.

The impact of a single tool “may be less than usual or more uncertain than usual,” he said in an online event. “If more stimulus is needed then, rather than lean ever more heavily on a single policy tool, in my view the most effective means may be to use a range.”

Both Saunders and Tenreyro are “external” part-time officials, and the comments reflect an apparent division on the MPC between them and the “internals,” who have full-time operational roles. The latter, which includes Governor Andrew Bailey, have shown the greatest signs of resistence to a subzero policy.

Saunders, one of the more dovish members of the BOE’s policy committee, said the experience of other countries with tiered reserve systems was that a rate reduction below zero lifts growth in much the same way as one above.

But he added that it may be preferable to move in “relatively small steps” rather than the normal 25 basis-point increments.

One reason for opposition to negative rates is their impact on bank profitability. While there may be a side effect, both Saunders and Tenreyro noted the offsetting role of better economic growth and stronger loan demand.

“Overall, I think the evidence is supportive,” Tenreyro said at an event hosted by Reuters. “Of course, there might be a idiosyncracies that we have to address and this would be part of the discussion before we ever move to negative rates.”

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