Bank of England signals limited enthusiasm for negative rates

The standout message from the latest Bank of England decision, is that the MPC as a whole still has limited enthusiasm for negative interest rates.

That’s become increasingly apparent from comments of various committee members over recent weeks, and is visible again in the findings of the Prudential Regulation Authority's (PRA) review of how negative rates would work in practice. The key conclusion is that it would take at least six months for the industry to reorganise systems and processes to cope with a sub-zero Bank rate - and policymakers will now ask the industry to prepare for a possible implementation beyond that time horizon.

But the meeting minutes contain no less than seven references to the fact that the committee doesn’t want us to interpret this as a signal that negative rates might be on their way. To us, this makes it abundantly clear that - as things stand - negative rates are unlikely to be used this cycle.

Several committee members have previously appeared sceptical of the benefits, and we agree that a further rate cut is unlikely to make a huge amount of economic difference - the cost of borrowing is not the central issue given the wider upheaval caused by Covid. Rate cuts also act with quite a lag.

Having said that, it’s clear the Bank wants the door to be kept ajar to negative rates. Don’t forget that the carefully-calibrated messaging the Bank has employed on negative rates has, until recently, helped persuade investors to begin pricing them - in effect achieving some of the benefits of lower rates without actually having to cross the Rubicon.

Nevertheless, the Bank’s latest forecasts make it clear policymakers don’t see the need for further stimulus. Its projections now assume the economy will regain all lost ground by the fourth quarter, and that unemployment will only be marginally higher at this point next year. Inflation is expected to be a little above target for the next couple of years.

While some of that in our view may turn out to be a little optimistic, the signal implies that neither a rate cut nor a further expansion in quantitative easing beyond this year is likely, if the Covid-19 story goes as hoped.

Importantly though, talk of tightening is clearly some way off - probably a 2023 story at the earliest. And on that note, the comment at the end of the minutes reiterates something that Governor Andrew Bailey talked about last summer - the fact that the Bank is more prepared to begin shrinking its government bond holdings before making significant progress on rate hikes. This underlines the point that the BoE, under Bailey, perceives QE as a much more useful way of adding or removing policy support at the margin, than the Bank rate.