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Bank of England Not Looking at Negative Interest Rates

The current low interest rates and on-going economic crisis have led to growing suggestions that the Bank of England (BoE) could turn to negative interest rates as a way of stimulating the country. However, the recent comments from the bank’s governor point out that they aren’t yet considering this option.

What Was Said?

Andrew Bailey is the governor of the BoE and he spoke out to cool the speculation about them moving to negative interest rates. Bailey said that the “hard yards are ahead of us”, referring to the current rise in coronavirus infections that is slowing down the economic recovery following the lockdown.

He then pointed out that not all industries are suffering equally, but that the problems many businesses are now facing act to “reinforce the downside risks” that they have included in their recent forecasts. The rise in companies paying collection agency fees to recover debts is a sign of the current problems faced in several industries.

Bailey was speaking at a virtual event that was held by the British Chambers of Commerce, and he commented that he is ready to support the UK’s economy in any way possible. But he also played down the possibility of using negative rates as a way of doing this in the near future.

The BoE has “looked hard” at the matter, according to Bailey, to see whether there is any scope to reduce interest rates even lower, which would almost certainly mean going into negative territory. He pointed out that the British economy has begun to bounce back, but that it is still up to 10% smaller than it was before the pandemic struck.

What Would Negative Interest Rates Mean?

The Bank of Japan and the European Central Bank are among the central banks that have already used negative rates to provide a degree of economic stimulation. Part of the reason that this works is that they charge commercial banks interest on the money that they hold in deposits, which encourages those banks to lend more money to customers.

The BoE governor said that this approach had led to mixed results in other countries. He told the audience that the timing of this move and the structure of the banking system in the country are vital factors in getting this right.

He confirmed that it is something that is in their toolbox if they need to find ways to handle a deeper downturn, but suggested that we shouldn’t expect to see it get used anytime soon. Some analysts had speculated that interest rates could fall below zero in 2021, but Bailey appeared to be looking further ahead in terms of considering this alternative.

The Reaction

The initial reaction in the markets was positive, as the pound rose a little to $1.28 against the US dollar following this news. This appears to reflect investors taking on board the speech from Andrew Bailey and reacting to the fact that interest rates should stay above zero for the time being.