Negative Rates Unlikely as COVID Cases Threaten UK Economy

As the pandemic intensifies its hold on the economy, Bank of England (BoE) Governor Andrew Bailey seems to be dampening down speculation about the introduction of negative rates, although noting that they are a part of the Bank’s toolbox.

He said the Bank is looking hard at how it can further support the British economy as escalating COVID-19 cases are threatening the economic outlook.

The Governor said there were “hard yards” to come and that the BoE would do everything it could to support the economy.

“We have looked very hard at the scope to cut rates further, including negative interest rates,” he said while speaking at a British Chambers of Commerce online event on Tuesday.

But the Governor is keeping his cards close to his chest and is suggesting that the Bank is only looking at the possibility and the mechanics behind such a decision —not at actually implementing them.

Bailey emphasized that last week’s monetary policy statement was not meant to suggest that the BoE would be imposing a negative Bank Rate. He did say, however, that negative rates were part of the central bank’s toolbox, and the BoE needed to know how to implement it.

“It doesn’t imply anything about the possibility of us using negative instruments,” the Governor said, noting that the bank was looking hard at how much scope there was to further cut interest rates, including going to negative ones.

“It would be a cardinal sin if we stated we had a tool in the box, which in practice we didn’t think we could operationally use,” Bailey said. “ So it is no surprise we’re going to do this work. It’s going to take time because there’s quite a lot of technical complexity,”

He added that nobody should read more into the statement but that it’s the next stage of the work to ensure commercial banks would be able to set a negative rate if it was introduced.

“The UK economy can be viewed as a glass half full or half empty,” he said.

Concerns over the pandemic have been rising as new cases have escalated to some 6,000 a day across the UK, with hospital admissions doubling every eight days and the testing system under strain.

“Obviously that does reinforce the downside risks,” Bailey said, adding that the rate of increase was “very unfortunate”.

Meanwhile, other central banks have already cut rates to negative ones, including the European Central Bank and the Bank of Japan. This is in an effort to prevent banks from seeking safe harbour for their cash at the central banks rather than lending it out to promote economic growth.

But Bailey said the experience of other countries’ use of negative rates had been “mixed”, with its effectiveness depending on how the banking system is structured and also the timing of the move.