A little over a year ago, we said negative rates were the Manchester United of monetary policy. By that, we meant they annoy a lot of people and their glory days were behind them.
But is the policy, like the Red Devils (who went top of the Premier League last night) set for a comeback?
It seems so — at least if some members of the Bank of England’s Monetary Policy Committee have their way. The Bank is in the throes of a review into whether venturing below the zero lower bound can help heal the UK’s economy, which has been one of the worst affected by Covid-19. Yesterday, Silvana Tenreyro, an external member, gave a vigorous defence of negative rates.
The speech is here. Whatever you think of negative rates, what seems odd to us is that the Bank is only now considering introducing them. As the speech notes, Denmark has been experimenting with the policy since 2012, the European Central Bank since 2014.
What’s more, Reuters reported Tenreyro as saying in the Q&A that followed her speech that rates could potentially fall below -0.75 per cent without running into some of the constraints of a negative interest rate policy. That’s almost a full percentage point of policy space.
Richard Barwell, economist at BNP Paribas Asset Management, put it like this:
One year into an existential economic crisis and the Bank has suddenly discovered that it has a percentage point of unused monetary ammunition. They should have established this long before the pandemic and exhausted it in the opening act of the crisis.
The Fed, which has been reasonably clear that it does not favour negative rates, effectively used all of its interest rate stimulus as soon as the pandemic hit US shores, cutting the federal funds target range from between 1.5 and 1.75 per cent to between 0 to 0.25 per cent during the first wave of the pandemic.
So why has the Bank not done the same?
To be fair, the BoE did cut rates by 0.65 percentage points to 0.1 per cent back in the spring of 2020. And while externals such as Tenreyro and Gertjan Vlieghe are keen on the policy, it remains unclear whether BoE insiders such as governor Andrew Bailey and Ben Broadbent would back a move into negative territory. Of course, if they are found to be a good thing, then they will be better late than never. But in only considering them now, it feels a little like the Bank is harking back to another feature of Manchester United’s glory days — Fergie time.
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