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BoE not remotely close to decision on negative rates, says chief economist

The Bank of England’s chief economist has said the bank is not remotely close to any decision on taking interest rates below zero to cope with the pandemic.

Andy Haldane said the key factors for the BoE to consider were the consequences of negative rates for banks and lenders, which would squeeze margins.

“Those are the aspects that we’ll look at,” Haldane said during an online discussion organised by the Confederation of British Industry on Tuesday.

“To be clear, reviewing and doing are different things and currently we are in the review phase and have not reached a view remotely yet on the doing.”

Since the start of the coronavirus outbreak, the bank has slashed its main rate to a record low of 0.1 per cent, prompting questions about whether it will cut into negative territory to stimulate the economy further.

It would mean banks are charged a small amount for keeping their money with their country’s central bank. The European Central Bank’s (ECB) deposit rate is currently minus 0.5 per cent.

Last week, BoE governor Andrew Bailey said it would be “foolish” to rule out negative interest rates. He has previously argued against them but admitted he had changed his position.

He was keen to highlight that the Bank is not saying it will cut rates further: “We’re not ruling it in but we’re not ruling it out.”

Haldane also said the recent economic data was coming in a “shade better” than a scenario published by the bank earlier this month.

“This is perhaps still a V but perhaps a fairly lop-sided V,” he said, referring to the shape of the economy’s downturn and recovery.

“The risks to that probably…lie to the downside rather than the up and as I say, a rather more protracted recovery even than the one that I have mentioned.”

By Angharad Carrick

Source: City AM

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Bank of England not ruling out negative interest rates

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

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Mark Carney says negative interest rates ‘not an option’ for BoE

Bank of England governor Mark Carney has said his institution will not pursue negative interest rates, a monetary policy device employed by the European Central Bank (ECB) and Bank of Japan, among others.

“At this stage we do not see negative rates as an option here. I am not criticizing others that have used them, but we don’t see it as an option,” he told Central Banking magazine earlier this month in an interview published today.

Negative interest rates seek to encourage banks to spend their spare money by penalising them for keeping it in their country’s central bank.

The BoE has been less willing to cut interest rates than some of its peers. The US Federal Reserve last month cut interest rates by 25 basis points (0.25 percentage points) and the ECB has heavily suggested further stimulus is coming.

Carney’s Bank has kept the main interest rate – which determines the cost of lending in the economy – at 0.75 per cent, citing high employment and inflation close to its two per cent target.

Yet a no-deal Brexit on 31 October, the date Britain is scheduled to leave the European Union, could cause the Bank to lower rates to support the economy during a likely shock.

Carney told Central Banking that negative interest rates can be “counter-productive”. He said the Bank’s view “is that the effective lower bound is close to zero, but positive – just above zero.”

The governor also said he does not think changing the Bank’s inflation target, which is set at two per cent, is a good idea.

“I am not a big fan of changing the target,” he said. “If you are having trouble getting to two per cent it is not clear to me why moving to three per cent really helps.”

The Bank’s favoured inflation rate was 2.1 per cent in July, official figures showed earlier this month. Inflation in the Eurozone, on the other hand, was just one per cent in July, official data showed today.

By Harry Robertson

Source: City AM