As the country continues to grapple with the effects of the pandemic, there have been renewed calls for interest rates to go below 0%. This comes as retail sales in the UK suffered a big drop in 2020 and fears grow over how deep the upcoming recession may be.
The Case for Dipping Below Zero
The subject of negative interest rates has been raised again by Silvana Tenreyro, who is one of the nine policy-makers that make the big decisions on the Bank of England’s (BoE) monetary policy. Tenreyro has claimed that cutting rates below zero could help the economy to grow without damaging the UK’s commercial banks.
She is Professor of Economics at the London School of Economics, and pointed out that moving to rates below zero is an idea that has worked well in other countries in the past. Tenreyro made these comments in a speech to the University of the West of England, where she stated that bank profitability wouldn’t be badly affected by doing this.
Currently, the BoE’s official bank rate is sitting at 0.1%, which is the lowest that it has ever been. It is believed that the monetary policy committee members are split on whether going to negative rates is the right decision or not just now. They are reported to be carrying out a feasibility study to see whether this would help growth without harmful side-effects.
Another area where the central bank could help is by ramping up the purchasing of assets through the BoE quantitative easing programme. Tenreyro confirmed that complete certainty is impossible, but that she believes there is a “high likelihood” that negative rates would lead to a boost for growth and inflation in the UK.
The Retail Figures
Meanwhile, the fact that non-essential shops were forced to close their doors several times in 2020 meant that it saw the biggest fall in retail sales for 25 years. This was despite the huge increase in online spending as people stayed at home to make their purchases.
The numbers come from the British Retail Consortium (BRC), who said that overall sales dropped by 0.3% from the 2019 figures. They confirmed that this is the poorest year-on-year performance since they began compiling these records in 1995.
Interestingly, by digging deeper we can see that some sectors of the retail market had a successful year, while for others it was a disaster. Among the worst-affected areas were hotels, pubs and restaurants.
We spent 5.4% more on food at shops and supermarkets than we did in 2019. Yet, the sales of every other type of product dropped by 5.4%, wiping out the food gains. This has led many retailers to look at ideas including international debt collection to make up their shortfall.
Matters are even worse when we look at the sale of non-food items in physical stores. This area witnessed a huge drop of 24%. In fact, 2019 had already seen the first drop in retail sales since 1995, with a 0.1% decline following on from poor wage growth numbers.
The year ended a little bit more strongly, as overall retail sales climbed by 1.8% in the run-up to Christmas, when compared to the numbers from a year ago.