Negative interest rates are a growing possibility
In a surprise to nobody, the Bank of England has kept interest rates on hold at 0.1% this month.
Announcing the decision, the Bank’s Monetary Policy Committee also provided some interesting commentary about the likely future direction of interest rates.
Looking ahead to next year, the MPC could take the Bank Rate below zero for the first time, as policymakers admitted they are preparing to support the economy with lower costs of borrowing.
In line with the European Central Bank and the Bank of Japan, the Bank of England is considering ways to overcome the challenges associated with negative interest rates.
It’s the first time the MPC has not ruled out a negative rate, after previously saying that such a move would make mortgage lending unprofitable for banks and building societies, causing them financial difficulties.
Within their September report, the MPC said: “The MPC had been briefed on the Bank of England’s plans to explore how a negative Bank rate could be implemented effectively, should the outlook for inflation and output warrant it at some point during this period of low equilibrium rates.”
There seems to be little prospect of a negative interest rate in 2020, as the Bank of England and the Prudential Regulation Authority won’t start its programme of structured engagement on the operational considerations until the final quarter of this year.
Much will depend on how the economic situation develops over the coming months. Negative interest rates are one tool available to policymakers should they need to stimulate the economy.
Adding to the programme of quantitative easing, or even putting cash in the hands of consumers (so-called ‘helicopter money) are more likely measures than negative interest rates.
The value of Pound Sterling fell on the speculation around negative interest rates, but later regained some of its losses.
In addition to keeping interest rates on hold and start to investigate negative interest rates in the future, the Bank voted unanimously to maintain its programme of quantitative easing, now at £745 billion after being increased by £300 billion since the onset of the pandemic in March.