Bailey Says Negative Rates Are Part of BOE’s Policy Toolbox

(Bloomberg) -- The Bank of England has plenty of room to add more monetary stimulus to fight the U.K.’s economic slump, including negative interest rates if needed, Governor Andrew Bailey said.

“We are not out of firepower by any means,” he said at the Federal Reserve’s annual policy symposium, being held virtually instead of the traditional venue at Jackson Hole, Wyoming. “To be honest it looks from today’s vantage point that we were too cautious about our remaining firepower pre-Covid.”

Since the pandemic struck, the BOE has unleashed a raft of stimulus measures, including slashing the benchmark rate to a record-low 0.1% and raising its asset purchase target to 745 billion pounds ($985 billion).

Economists largely expect bond purchases to be raised again before the end of the year, and investors are betting that interest rates will be lowered to zero by September 2021.

The pound stayed higher after Bailey’s remarks, and was up 0.7% higher at $1.3296 as of 2:46 p.m. London time.

Bailey also reiterated his view though that central banks will need to ensure that they have the headroom to take action in the coming decade. That confirms a major shift in the BOE’s strategy for removing emergency stimulus that he made earlier this year, when he stressed the need to reduce the institution’s balance sheet before hiking rates.

The appropriate policy mix “may be more nuanced than previously thought,” he said Friday, noting that expanding the range of assets purchased is another way to create more headroom.

“Let’s not ignore the need to manage central bank balance sheets,” he said. “There are times when we need to go big and go fast.”

The speech was Bailey’s biggest international appearance since he started the job in March. Fed Chair Jerome Powell used the same forum to unveil a new approach to setting U.S. monetary policy, letting inflation and employment run higher in a shift that will likely keep interest rates low for years to come.

Hardest Hit

The pandemic has wrought havoc on the U.K. economy, prompting a 20% contraction in the second quarter that was the biggest among major developed nations. Still, BOE policy makers have delivered an upbeat assessment for Britain’s economy, saying that the hit from the coronavirus was shallower than initially thought, and the consumer-driven rebound faster.

The BOE has been actively reviewing the possibility of following its peers in Europe and Japan in cutting rates below zero for the first time.

In comments earlier this month, Bailey raised the prospect of possibly doing so after the coronavirus crisis has passed, saying the radical policy might be more effective in a revival rather than in a slump.

“The Covid crisis to date has demonstrated that quantitative easing and forward guidance around it have been effective in a particular situation,” he said. “We need to take on board the message the Covid crisis has reiterated, namely that our tools may be state-contingent in their effects.”

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