Bank of England eyes negative interest rates

The Bank of England (BoE) on Thursday, September 17, gave its strongest hint yet that negative interest rates could be on the way as the United Kingdom economy battles against the coronavirus and Brexit headwinds.

Following a regular policy meeting, the BoE led by Governor Andrew Bailey left its key interest rate at a record low of 0.1% amid low inflation and rising unemployment caused by COVID-19 fallout.

The central bank also maintained its cash stimulus, or quantitative easing (QE) supporting the economy, at £745 billion ($947 billion, 802 billion euros), the minutes of its latest meeting showed. 

Markets expect the QE amount to increase before the end of the year.

“The outlook for the economy remains unusually uncertain,” the BoE minutes stated, triggering fresh falls in the pound.

Sterling dropped 0.7% against the dollar “after the Bank of England delivered a dovish statement which included overt references to introducing negative rates,” said Neil Wilson, chief market analyst at Markets.com.

The pound, which later recovered most of the losses, had already come under heavy selling pressure this month from the possibility that Britain and the European Union would fail to strike a post-Brexit trade deal. 

As well as the pandemic, Britain’s future trading position with the EU is firmly in the BoE’s sights.

‘Exploring negative rate’

“The path of growth and inflation will depend on the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom,” the minutes stated. 

“It will also depend on the responses of households, businesses, and financial markets to these developments.”

The BoE said it was exploring “how a negative bank rate could be implemented effectively, should the outlook for inflation and output warrant it.”

The central bank said it would begin “structured engagement on the operational considerations in” the 4th quarter.

A negative interest rate would likely see retail banks further cutting their own borrowing costs, adding more pain to savers while boosting borrowers.

Jobs, inflation fears

The BoE update came after the Federal Reserve on Wednesday, September 16, pledged to keep boosting the United States economy with low rates to help recover millions of American jobs lost in the pandemic.

European Central Bank president Christine Lagarde is meanwhile urging governments to support central bank efforts with fiscal spending.

Although the world economy is bouncing back from the lockdowns that devastated economic activity earlier this year, several nations are grappling with a renewed rise in coronavirus infections, slowing the financial recovery.

The BoE meanwhile on Thursday ruled out tightening interest rates “until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.”

Britain is far from achieving either goal, having fallen into its deepest recession on record following its virus lockdown and with the country’s inflation rate at a 5-year low of 0.2%.

Should Britain suffer deflation, or falling prices threatening also other nations, the risk is of further job losses at a time when UK companies are shedding hundreds of thousands of positions on virus fallout.

British unemployment is set to surge in the months ahead as the government ends in October its furlough scheme that has been paying the bulk of wages for millions of workers.

“It looks like Bailey is prepared to go big and fast if there is an unemployment crisis once the furlough scheme ends,” added analyst Wilson. 

“For the time being he is keeping his powder dry.” – Rappler.com