The UK’s top rate setter Monday reiterated his mixed messages over the implementation of negative rates, warning that the Bank of England (BoE) has no imminent plans to push borrowing rates below zero.
“We are not near and haven’t addressed whether we should use them,” said BoE Governor Andrew Bailey in a virtual Citizens’ Panel Open Forum on Monday.
Bailey spoke several hours after Bank Deputy Governor for Prudential Regulation Sam Wood released a letter sent to British banks inquiring about their “operational readiness” for zero or negative bank rates.
“This morning, we issued a letter to banks asking how quickly negative rates could be introduced…Can IT systems accept negative rates,” said Bailey, adding that he is assessing the procedural issues, “not asking shall we do it.”
He also stressed that sub-zero rates could have a “damper” effect on the UK economy given the size of retail deposits in the British financial system, as few jurisdictions have dared impose negative returns on non-commercial savers.
Yet, Bailey’s gloomy outlook on the economy raised speculation that the Bank will undertake further stimulus measures in the months to come. Covid has caused “the highest level of uncertainty in the last 25 years…for as long as we’ve been doing these forecasts,” he said.
The economy could also face a trade shock, should trade negotiations between the UK and the European Union fail to produce a deal. The UK is due to exit a transition period at year-end and is still feuding with the bloc over arrangements for state aid and access to UK fishing waters.
Bailey also stressed that, despite adhering to a government-mandated inflation target of 2%, rate setters do have some flexibility to consider employment in setting monetary policy. The Bank’s Monetary Policy allows “different projections” of the timeframe of returning inflation to target. “How quickly we do that will have an impact on output and employment,” he said.