The Bank of England has told British banks that they should take whatever steps are necessary to prepare their systems for negative interest rates, opening up a pathway for the central bank to use this additional policy tool to encourage more lending.
But policymakers cautioned on Thursday that they were not trying to send the signal that rates would be cut to zero or lower imminently. The markets responded accordingly: The British pound and bond yields rose as traders pared back expectations for a future rate cut.
The central bank’s monetary policy committee held interest rates at 0.1 percent and continued its asset-buying program at the same pace.
For months, there has been a debate about whether the Bank of England could introduce negative interest rates as another mechanism to bolster the economy. A negative interest rate would mean charging banks to store cash at the central bank, a policy that would influence the other interest rates in the economy, for example, on loans to businesses and households. Lowering these rates would, in theory, encourage more borrowing and investment.
The European Central Bank and Japan’s central bank have had negative interest rates for several years, but there were questions about how effective this move would be in the British banking system. Among them were concerns that the policy would hurt British savers or that banks might take steps to protect their profitability that would diminish the effectiveness of the policy, such as raising fees and other rates or reducing lending.
Still, some policymakers, including Silvana Tenreyro, a member of the monetary policy committee, have said they believe negative interest rates will stimulate economic growth and bring inflation closer to the bank’s goals.
After consulting with banks about whether it would be feasible to cut rates further, the central bank found that most firms would need to make some changes to their systems and processes. On Thursday, it asked the banks to begin making these changes.
“While the Committee was clear that it did not wish to send any signal that it intended to set a negative Bank Rate at some point in the future, on balance, it concluded overall that it would be appropriate to start the preparations to provide the capability to do so if necessary in the future,” the minutes from February’s monetary policy meeting said. Banks should prepare “to be ready to implement a negative Bank Rate at any point after six months.”
The central bank on Thursday also updated its forecasts for the British economy, which is trying to emerge from a deep recession and also dealing with the initial impact of Brexit, its divorce from the European Union’s single market and customs union. It said the economy did not suffer as badly at the end of 2020 as previously expected, but there would be a downturn in the first quarter of 2021 because of the long lockdown while vaccinations were rolled out.
Gross domestic product is now forecast to fall 4.2 percent in the first three months of the year. That’s a downgrade from November’s forecast, when the central bank had predicted growth of more than 2 percent.
But the economy is still predicted to return to its pre-pandemic size in early 2022, with consumers spending heavily once the pandemic restrictions were lifted. British households accumulated more than 125 billion pounds ($171 billion) in extra savings from March to November last year, and the central bank expects at least 5 percent of these savings to be spent in the next few years, a conservative estimate.
“With pent-up savings set to be unleashed later this year by consumers looking to make up for lost time, the likelihood of negative rates being implemented in the U.K. this year is reducing,” Hugh Gimber, a strategist at JPMorgan Asset Management, wrote in a note.
He added, though, the central bank “has an eye on their options to guard against the next hit to the U.K. economy, whenever that may come.”
