BoE’s Bailey Discusses Negative Rate Criteria

The UK’s top rate setter suggested that negative interest rates may be more effective once an economy begins to recover, but repeated that the Bank of England (BoE) is not considering an imminent rate cut.

“We’re not there at the moment,” said BoE Governor Andrew Bailey Tuesday, addressing the House of Lords Economic Affairs Committee virtually. Rather, recent investigations into the efficacy of such policy in the UK are aimed at coming to “judgement about the appropriateness of the tool”.

This week, the Bank sent questionnaires to UK banks, querying whether procedural and computer systems are capable of processing sub-zero interest rates. Bailey also repeated that the transmission of negative rates through the UK economy may be weaker than in the eurozone. Britain’s financial system relies more heavily on retail bank deposits, and banks are unlikely to pass on negative rates to savers.

However, Bailey’s discussion of negative rates – a conversation he admitted that he has “every day” – was more detailed than any previous comments from the members of the Bank’s rate-setting Monetary Policy Committee since the policy instrument was first mooted over the spring.

The governor did suggest that any move to sub-zero rates is more likely once the UK rebound is firmly established, citing the experience of the European Central Bank. “Doing it at that point [counters] the negative effect on net interest margins and coincided” with the worst of losses linked to non-performing loans, he said. “It also acted as an inducement to investment.”

Bailey reiterated his belief that output had fallen 9-10% below late-2019 levels at the end of September, and stressed that a V-shaped recovery is “not the way I look” at the UK economy “at the moment”.

He also refused to be drawn on whether a recently announced scheme to guarantee the mortgage debts for first-time buyers posed a threat to financial stability, saying, “That’s a question for the government, not for the Bank of England.”

Addressing the Conservative party conference earlier this month, Prime Minister Boris Johnson announced plans for government-backed loans of up to 95% of a property’s value to help younger buyers on to the property ladder. However, “activity numbers don’t show that there’s been a decline in first-time buyers,” said Bailey.

Laurie Laird

Julie Ros
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Julie Ros

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