Government bonds have been sold in Britain for the first time with a negative yield.
And the Bank of England has admitted it would be “foolish” to rule out cutting interest rate to below zero.
The negative yield bond (a £3.8billion three-year gilt auction with an interest rate of -0.003 per cent) effectively means investors are paying lend money to fund the Government as it deals with the financial impact of the coronavirus pandemic.
And Bank of England governor Andrew Bailey said how low the cost of borrowing could go would be kept under “active review”.
He said: “We do not rule things out as a matter of principle. That would be a foolish thing to do. But that doesn’t mean we rule things in either.:
Minimal or negative interest rates deter savers with the intention of them spending what money they have to stimulate the economy.
Tim Watkins, managing partner of Shurdington-based accountants Randall & Payne, said: “Another first!. Britain had never sold a government bond with a negative yield until Wednesday.
“The interest rate is 0.75 per cent but the price investors paid for the bonds was more than they will receive when the bond is repaid.
“A first for Britain but we join Japan, Germany and some others. It doesn’t mean investors will make a loss as bonds are traded but it’s a position no one would have imagined a few months ago.”
He continued: What does it signal? It’s an indication, if another was needed, that there could be a major recession coming, central banks want to own safe assets in these circumstances and our debt is considered safe.
“It’s a relief at the moment with such a borrowing requirement that Britain is considered safe and the cost of borrowing is low.
“If that were to change it would add even further to the debt mountain we could have when this is all over.”
Martin Day, director of The Bespoke Banking Consultancy in Gloucester believes the spectre of negative interest could encourage spending as the economy shrinks.
He said: “It seems the policymakers will come under more pressure to take action to boost the economy as the UK sells bonds with a negative yield for the first time.
“The sale does reflect rising expectations that the Bank of England will increase its £200billion bond purchase shortly.
“Bank of England governor Andrew Bailey recently told MPs that the possibility of negative rates is being kept under review.
“This move could be used to urge corporates and companies to spend rather than hold funds in bank accounts.”
By Rob Freeman
Source: Punchline Gloucester