Extract from Redwood Financial’s Economic Review August 2020
The BoE left base rates unchanged following the latest meeting of its Monetary Policy Committee (MPC) but stated that it was ‘currently considering’ the case for cutting interest rates below zero.
At a meeting held on 4 August, the MPC voted unanimously for no policy change, with the Bank Rate maintained at a record low of 0.1%. In addition, the minutes of the meeting stressed the Bank has no intention of raising rates until there is ‘clear evidence’ that a recovery has taken hold. The minutes also stated that the MPC continues to ‘monitor the situation closely’ and that it is keeping under review a range of possible policy responses.
One potential course of action open to the MPC is to impose negative interest rates in order to provide stimulus to the economy, a path that central banks in both Japan and the Eurozone have gone down. The BoE confirmed they are currently considering whether the Bank Rate could be cut below zero and whether such a policy might prove to be an effective tool in the UK.
However, BoE Governor Andrew Bailey again reiterated that policymakers are unlikely to introduce negative rates at any point soon, partly because such a move could inadvertently reduce bank lending or lead to customers withdrawing their savings and holding them in cash. Additionally, there is a fear the public will find the whole concept of negative interest rates difficult to comprehend.
Commenting specifically on the prospect of negative rates, Mr Bailey said: “They are part of our toolbox… but at the moment we do not have a plan to use them. There would be a lot of explaining to do on what this means, why we’re doing it, and what the benefits would be.”