—MPC External Member Saunders Also Sees Merit in Sub-Base Rate lLnding to Corporates
By Laurie Laird
LONDON (MaceNews) – Any expansion of quantitative easing will pack a greater punch if coupled with a rate cut, according to a key Bank of England official, who believes that borrowing rates in the UK have yet to reach their effective lower bound.
“Further asset purchases by themselves may be less effective in providing additional stimulus … unless accompanied by a cut in the Bank Rate (or guidance that such a cut is likely,)” said Michael Saunders, an external member of the Bank’s Monetary Policy Committee, in a BOE-sponsored webinar Friday.
Acknowledging that the Bank has “relatively limited”room to manoeuvre, Sanders noted “with interest” the notion of a “dual interest rate structure,” anomalous to the European Central Bank’s Targeted Long Term Refinancing Operations, or TLTROs, which currently provide bank finance at 50 basis points below the ECB’s deposit rate, implying a long-term borrowing rate of -1.0%.
Adopting such a scheme would exert less pressure on bank profitability than implementing a sub-zero bank rate, according to Saunders. “The availability of funding at below the policy rate implies that, for banks that meet the lending targets, lending rates can be reduced without a squeeze on [net interest margins], even if deposit rates do not fall,” he said. However, he admitted that such a measure is “not currently in the Bank’s toolbox.”
Nonetheless, Saunders – a noted dove – believes that the official bank rate, currently at 0.1%, has not reached its effective lower bound. “In my view, there may be some modest scope to cut [the] Bank Rate further but, if we do, it may be preferable to move in relatively small steps,” he said.
The Bank of England has asked financial institutions to assess their technical abilities to process negative interest rates; an announcement on that consultation will come “when we are ready,” said Saunders, adding that an update might occur “reasonably soon.”
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Contact this reporter: laurie@macenews.com.
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