BoE Chief Reviews Negative Rates; Downplays Cut

The Bank of England (BoE) is continuing to review the efficacy of negative interest in the UK, but the country’s leading central banker Tuesday downplayed the possibility of any policy change over the near term.

The Bank is “doing the groundwork” on the benefit of sub-zero rates, but has “reached no judgement on whether or when” to use them, said BoE Governor Andrew Bailey, in an address to the Queen’s University Belfast Chief Executives’ Club.  “It would be cardinal sin if we had a policy tool [such as negative rates], but we didn’t know how to put it into effect,” he added.

The governor refused to be drawn out on the timing of the policy review, saying only that the Bank has “a lot of practical work to do”.  He did promise to be “transparent” over the results, particularly in explaining the consequence of negative rates on savers.

Bailey’s latest attempt to detail the Bank’s thinking comes after conflicting comments over the suitability of lower rates in the UK. Over the weekend, Silvana Tenreyo, an external member of the Bank’s Monetary Policy Committee, discussed “encouraging” evidence from other countries in an interview with a UK newspaper.

However, a BoE Deputy Governor, Dave Ramsden, told a group of economists that he views the effective lower bound of rates at the current level of 0.1%.

Governor Bailey admitted that the “transmission mechanism” of lower rates could be less effective in the UK, where banks carry a higher level of retail deposits than those on the continent. The main European Central Bank deposit rate has remained at -0.5% since before the Covid-induced recession. Bailey also reiterated concerns over the ability of computer systems to manipulate negative numbers. “Can IT systems take negative numbers…or will that blow the system up?”

Evidence from Europe suggests that negative rates may be more effective after an economy has reached bottom, Bailey added. “The ECB found that [negative rates] helped companies during the recovery phase,” he said.
The governor delivered a somewhat brighter assessment of the UK economy.

The Bank believes output is currently 7-10% below pre-Covid levels, but should recover further through the end of the third quarter. The recovery is “a bit ahead of where we thought we would be” at the time of the August Monetary Policy Report, he said.

However, Bailey believes that Covid restrictions which prevent door-to-door statistical collection, have led to an understatement of the UK employment rate, last recorded at 4.1% in the three months to July. “One of the hardest things to assess is the labour market,” he said.

However, the Bank continues to favour official data over real-time indicators, the governor said, in response to a question by Mace News. Short-term indicators such as payments and mobility figures “are not a substitute for official data”.

Laurie Laird

Julie Ros
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Julie Ros

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