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The UK Could Move to Negative Interest Rates

The Bank of England could be getting ready to introduce negative interest rates. Speculation about an interest rate cut has grown due to the country selling a bond with negative yield for the first time in history.

Details of the Bond

The bond in question is a £3.8 billion gilt issue that was auctioned by the Debt Management Office. It is designed to fund the government’s response to the Covid-19 crisis, and comes with a negative interest rate of 0.003%.

The negative rate means that anyone who buys a bond will need to pay a nominal amount for it, instead of receiving interest. Despite this, the sale was over-subscribed, as people look for safe havens in which to keep their money.

It is expected that the BoE will extend its bond purchase programme in the near future, to aid the struggling economy and try to help inflation get closer to the target of 2%.

The decision to offer a bond at negative rates has been described as being a symbolic moment, as the UK joins a number of other countries around the world that have already issued negative interest rate bonds.

Demand for the bond was £8.1 billion, showing that this type of gilt is still in demand even when the return on it is negative. This comes against a backdrop of further job cuts and company closures, with many businesses paying collection agency fees to allow them to carry on.

A Summary of the Reaction

The high level of demand for this bond has helped to allay fears that the government’s big-spending approach to the crisis may have put off investors.

This issue has also helped to fuel speculation that the BoE may be ready to move interest rates into negative territory. The pressure on them to do this has increased due to the annual UK consumer price inflation rate halving to 0.8% in the last month, which is the lowest in close to four years.

This drop in inflation has largely been blamed on the price of petrol falling, but there are fears that the current economic crisis could see inflation continue to plunge. With the interest rate sitting at just 0.1%, any further cuts will almost certainly see it dip under zero for the first time ever.

BoE decision-makers have been coy over what might happen in their future meetings. Governor Andrew Bailey said that they wouldn’t rule anything out, nor rule anything in. He confirmed that they are actively considering all of their options, having previously ruled out negative rates.

Some analysts have pointed out that negative interest rates might not be the best way out of the crisis, though. They claim that it would be the wrong move at this time. Recent comments suggest that Bailey may be of the same opinion, with fears that this could make the banking sector unprofitable.

With the European Central Bank and the central bank in Japan both moving to negative interest rates, the UK and the US remain as the main global economies that haven’t yet gone below zero in an attempt to stimulate the economy.