LONDON (Reuters) – The Bank of England said its policymakers had been briefed on how they could cut interest rates below zero as Britain’s economy faces the combination of rising COVID-19 cases, an expected jump in unemployment and a possible new Brexit shock.
The BoE said on Thursday its nine monetary policymakers voted unanimously to keep their main stimulus programmes on hold and that the world’s sixth-biggest economy was recovering faster than it had thought as recently as last month.
The Monetary Policy Committee said the economy was likely to continue its recovery and be 7% below its end-2019 size in the third quarter. In August, the BoE had said the economy would be 9% below its end-2019 level in Q3.
“The Committee will continue to monitor the situation closely and stands ready to adjust monetary policy accordingly to meet its remit,” the BoE said. “The MPC will keep under review the range of actions that could be taken to deliver its objective.”
Britain suffered the biggest economic contraction among Group of Seven nations between April and June, slumping by 20%, and like other central banks around the world, it is studying how best to use its limited room for manoeuvre.
On Wednesday, the U.S. Federal Reserve promised to keep rates near zero percent until inflation is on track to “moderately exceed” its 2% inflation target “for some time”.
Many analysts have said they expect the British central bank to increase the size of its bond-buying programme in November.
The BoE said on Thursday the MPC had been briefed on how its previously announced 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.”
Sterling fell sharply after the announcement, weakening by around 0.5% on the day against the U.S. dollar to $1.29.
CLOUDS GATHERING
“The economic recovery has so far exceeded the Bank’s earlier projections but storm clouds are gathering with new social restrictions in place, the furlough scheme unwinding and Brexit rearing its head again,” said Jon Hudson (NYSE:HUD), UK equities investment manager at Premier Miton.
“With inflation well below target, it’s therefore unsurprising to see the MPC hinting at further stimulus in the coming months.”
Governor Andrew Bailey and some of his colleagues have previously said that they were still working out the pros and cons of following the lead of other central banks, including those of the euro zone and Japan, and taking rates negative.
The BoE said on Thursday that it would “begin structured engagement on the operational considerations in 2020 Q4”, a sign that it would look at how to take rates below zero without hurting banks’ ability to lend and damaging the recovery.
As expected, the BoE kept its benchmark interest rate at 0.1% and left unchanged the size of its bond-buying programme at 745 billion pounds ($966 billion).
Economists polled by Reuters had expected the BoE to hold steady at its September policy meeting.
($1 = 0.7712 pounds)
Source: Economy - investing.com
