BOE Splits Between Insiders and Outsiders Over Subzero Rates

The Bank of England is seeing old fault lines open up as officials lock horns on whether to take interest rates below zero for the first time.

That’s what the math on the nine-member Monetary Policy Committee is starting to look like, as the so-called “internals” on the panel with full-time operational roles at the central bank show the greatest signs of resistance to the measure. The minority of part-time “external” officials tend to be more open to subzero policy.

BOE Splits Between Insiders and Outsiders Over Subzero Rates

“There is a split in the MPC between internals and externals on negative rates, and I think that has been a key factor in the Bank of England’s delay in additional stimulus,” said Robert Wood, chief U.K. economist at Bank of America Merrill Lynch and a former BOE official.

Those lines of disagreement help explain the institution’s slow-paced approach to subzero rates in the intellectual battle over how to aid Britain’s devastated economy beyond the current stimulus. While all agree the measure should be in the toolbox, and have done for months, the BOE has postponed a decision by ordering a study into the finance industry’s preparedness for such a policy.

Dave Ramsden, who as deputy governor for markets and banking would be pivotal in any change, has urged caution, playing down the possibility that it could be imminent and citing the need to engage with banks.

Governor Andrew Bailey, the public face of the institution, has sounded similar notes, wondering if computer systems can handle negative figures. Deputy governors Ben Broadbent and Jon Cunliffe have likewise expressed caution, while even Chief Economist Andy Haldane, a perennial wildcard, insists time is needed to study the matter.

That’s left the externals, especially those from academia, as the most supportive voices. Silvana Tenreyro, who has previously said there was evidence subzero rates have been effective, reiterated that point on Monday, adding the profitability of banks isn’t an obstacle to imposing them.

Jonathan Haskel has also cited research showing the policy works elsewhere, while Gertjan Vlieghe has said going below zero isn’t counterproductive, and officials should try to increase headroom for action. Michael Saunders will give a speech on Friday entitled “Some Monetary Policy Options -- If More Support Is Needed.”

The BOE avoided following the European Central Bank into negative rates amid concerns at their impact on banks. But with the benchmark now at an all-time low of 0.1% to aid the economy, quantitative easing in full flow, and post-Brexit trade relations about to set in, it was maybe inevitable the policy would be reconsidered.

Investors have dramatically reduced bets on negative rates in recent months. They are no longer pricing in a cut below zero in 2021, having previously seen such a move in the first half of that year.

Council of Nine
  • The nine-member MPC, established in 1997, has five internals, giving the institution’s officials a casting vote over the four externals, who are normally professional economists with a background in academia or business.
  • An early fight between them in 1999 was over the externals’ ultimately successful demand for access to dedicated support staff.
  • In 2005, Mervyn King made the first dissenting vote by a governor, declining to support a rate cut pushed through by the four externals and his chief economist, Charles Bean.
  • In 2012, King faced a revolt from the four externals incensed at being kept out of the loop on a secret BOE lending program in the works to aid growth.

An MPC split between the two classes of officials wouldn’t necessarily center on the need for more stimulus, but it would be a rift that hasn’t been seen in a while. Andrew Sentance says the panel had more such disagreements when he served on it from 2006 to 2011.

“There have been various times, in the late 1990s and when myself and Danny Blanchflower were on the committee, that the external members exercised quite a striking difference in opinion,” he said in an interview.

If the split does harden between the two groups, the impression of an institution shunning the views of outsiders could become sensitive for the BOE, which has been accused of “groupthink” and being too conservative.

Such a confrontation would echo an argument earlier this decade on whether corporate bond purchases could become part of QE. “The bank executive closed ranks on this one particular issue,” former external member Adam Posen told lawmakers in 2013. Officials might each still have valid reasons to stand against such a policy however.

“The internal members have got different constituencies to an extent, in terms of financial stability concerns, operational concerns, political concerns perhaps,” said Chris Hare, an economist at HSBC Holdings Plc and a former BOE official. “You could imagine a pretty substantial degree of wariness about negative rates over and above the externals, who maybe have a bit more of a free rein to talk about the macro theory side of things.”

Two Classes of Policy Maker

Governor Andrew BaileyFour externals:
Deputy Governor Ben BroadbentJonathan Haskel
Deputy Governor Jon CunliffeMichael Saunders
Chief Economist Andrew HaldaneSilvana Tenreyro
Deputy Governor Dave RamsdenGertjan Vlieghe

Still, if the externals want to push their point against the internals over negative rates, they may need courage, according to Sentance, who says taking on the institution’s heavyweights isn’t for the faint-hearted.

“You have to be quite brave to set yourself in the minority,” he said. “It’s not difficult, you just have to be willing to do it. You have to be brave and coherent.”

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