Bank of England 'could turn interest rates NEGATIVE'

Bank of England could turn interest rates NEGATIVE as part of efforts to prop up the economy amid coronavirus crisis, says governor Andrew Bailey

  • Bank of England governor Andrew Bailey has been giving evidence to MPs
  • He said it would be ‘foolish’ to rule out turning the Bank interest rate negative 
  • The UK government has sold bonds at a negative return for the first time today 
  • Here’s how to help people impacted by Covid-19

The Bank of England could cut interest rates into negative territory as part of efforts to prop up the economy, it said today.

Governor Andrew Bailey told MPs it would be ‘foolish’ to rule out the move – which would effectively mean institutions paying to keep cash in the bank. 

The central rate is already at an historic low of just 0.1 per cent, but in theory going further should encourage people to spend more rather than sitting on savings, as often happens in a recession. 

The signal comes as the UK joined the small group of countries that have sold bonds for negative rates, meaning the government will return slightly less to investors when the gilts mature.  

Amid rising fears about the impact of the pandemic on the global economy, the government’s OBR watchdog and the Bank have warned UK GDP could tumble by between 25 per cent and 35 per cent. 

Governor Andrew Bailey told MPs it would be ‘foolish’ to rule out the move – which would effectively mean institutions paying to keep cash in the bank

Economists have been warning that the UK is heading for the biggest recession in 300 years

The central Bank rate is already at an historic low of just 0.1 per cent, but in theory going further should encourage people to spend more rather than sitting on savings, as often happens in a recession

Under a negative rate policy, financial institutions are required to pay interest for keeping excess cash with the central Bank.

In theory avoiding the charges is an incentive for commercial banks to lend more to businesses and consumers, helping growth.

A major problem in recessions can be people sitting on savings. 

Negative rates were introduced by the European Central Bank in 2014. Its deposit rate is currently -0.5 per cent.

The Bank of Japan went negative in 2016, mostly to prevent a strengthening yen from hurting its export-heavy economy. 

Although both expect a quick rise if lockdown can be eased, it would still mean the biggest downturn in 300 years for the whole of 2020 – dwarfing the impact of the credit crunch, Second World War, First World War and Spanish Flu.  

Bank officials have been increasingly hinting at the idea of negative interest rates, which were introduced by the European Central Bank in 2014. Its deposit rate is currently -0.5 per cent.

The Bank of Japan went negative in 2016, mostly to prevent a strengthening yen from hurting its export-heavy economy.

Giving evidence to the Treasury Select Committee this afternoon, Mr Bailey said the Bank of England ‘doesn’t rule things out as a matter of principle’. 

‘That would be, I think, a foolish thing to do. But can I then follow that up by saying that doesn’t mean that we rule things in,’ he said.

‘The MPC has a history, really since the financial crisis… of keeping under periodic review the so-called lower bound.

‘We’re very keen to observe and are observing how the economy responds to the cuts that we have made.

‘(We’re) looking very carefully at the experiences of those other central banks that have used negative rates, and a number of them are actually publishing quite interesting assessments at the moment.’

The Bank has already said it is buying up at least £200billion of state debt, which should help keep interest rates on government borrowing low.   

Apocalyptic predictions from the Bank and England and others show the UK is on track for the worst downturn since the Great Frost swept Europe in 1709

Deputy governor Ben Broadbent told the committee that he did not expect a V-shaped downturn and recovery.

‘If one is to use a letter of the alphabet – and I heard a lot about our scenario being ”V”-shaped – it is a pretty lopsided V, and there is no doubt that in our scenario the recovery is far from immediate and takes place over a longer period of time,’ he said. 

He also dismissed concerns that inflation would end up getting out of control due to public debt, low rates and other Bank interventions to boost money supply. 

‘The best way to gauge the market’s assessment of (inflation) risks is to look at the market’s assessment of inflation risks, and we can do that by looking at the bond market… and there is not an increase in inflation risk in the opinion of the market, if anything the opposite,’ he said. 

The exchanges came after it emerged investors had bought UK government gilts knowing they will get back less than they paid for them.

The debt management office (DMO) said it had sold £3.8billion of three-year gilts at a yield of -0.003 per cent.

Only a small group of countries, including Germany and Japan, have sold gilts with negative return.  

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