The Bank of England has advised UK banks that they should take all necessary steps to prepare their systems for negative interest rates. This opens up the possibility for the central bank to use this additional policy tool to encourage more credit.
However, policy makers warned Thursday that they would not attempt to send the signal that interest rates would be cut to zero or lower immediately. The markets responded accordingly: UK pound and bond yields rose as traders lowered expectations for a future rate cut.
The central bank’s monetary policy committee kept interest rates at 0.1 percent and continued its asset purchase program at the same pace.
There has been a debate for months about whether the Bank of England could introduce negative interest rates as another mechanism to strengthen the economy. A negative interest rate would mean that banks would be asked to store cash with the central bank. These policies would affect other interest rates in the economy, for example on corporate and household loans. Lowering these rates would theoretically lead to more borrowing and investment.
The European Central Bank and the Central Bank of Japan have had negative interest rates for several years, but there have been questions about how effective this move would be in the UK banking system. These included concerns that the policy could harm UK savers or that banks could take steps to protect their profitability that would undermine the effectiveness of the policy, such as: B. Increasing fees and other interest rates or reducing lending.
However, some policy makers, including Silvana Tenreyro, member of the Monetary Policy Committee, believe negative interest rates will stimulate economic growth and bring inflation closer to the bank’s goals.
After consulting with the banks about whether another rate cut would be possible, the central bank found that most companies would need to make some changes to their systems and processes. On Thursday banks were asked to make these changes.
“While the committee understood that it did not want to send a signal that it intended to set a negative bank interest rate at some point in the future, the overall conclusion was that it would be appropriate to begin preparing to provide the ability to do so if necessary to do in the future, ”said the minutes of the monetary policy meeting in February. Banks should prepare to “be ready to introduce a negative bank interest rate anytime after six months”.
The central bank also updated its forecasts on Thursday for the UK economy trying to emerge from a deep recession, and also looked at the initial effects of Brexit, the European Union’s divorce and customs union. The economy was said to have not suffered as badly in late 2020 as previously expected, but there would be a downturn in the first quarter of 2021 due to the long lockdown during the introduction of vaccinations.
The gross domestic product is now expected to fall by 4.2 percent in the first three months of the year. This is a downgrade from November’s forecast, when the central bank forecast more than 2 percent growth.
However, the economy is expected to return to pre-pandemic size in early 2022 and consumers will spend heavily after pandemic restrictions are lifted. UK households accumulated more than £ 125 billion (US $ 171 billion) in additional savings from March to November last year, and the central bank expects at least 5 percent of those savings to be spent over the next several years, a conservative estimate.
“As pent-up savings are released later this year by consumers looking to make up for lost time, the UK is less likely to see negative rates rolling out this year,” wrote Hugh Gimber, strategist at JPMorgan Asset Management, in a note.
However, he added that the central bank is “keeping an eye on its ability to protect itself from the next blow to the UK economy whenever that comes”.