By Laurie Laird
LONDON (MaceNews) – The UK’s top central banker sketched out the details of the Bank of England’s deliberations on sub-zero interest rates on Tuesday, dropping his heaviest hint yet that rates could fall into negative territory over the medium term.
“We’ve got to work with the banks” to ensure that negative rates don’t “blow up” their “plumbing” systems, said Bank of England Governor Andrew Bailey, in a online address hosted by the British Chambers of Commerce.
Bailey noted that the British banks maintain a higher level of retail deposits than in other regions that have deployed negative interest rates. The efficacy of sub-zero rates also depends on “the point in the economic cycle” in which they’re implemented and the manner in which the measure is communicated to the public, he added.
Bailey shocked observers back in May when he admitted that negative interest rates were under consideration, reversing his position on the policy. But Tuesday marks the first time he has detailed the bank’s thinking about the effect of sub-zero rates on the UK economy. The bank announced two emergency cuts to its benchmark rate in March, leaving UK rates at a record-low 0.1%.
The bank has predicated its forecasts on an “orderly move to a comprehensive free trade agreement with the European Union” at the start of next year. Negotiations between the UK and the EU have yet to produce a framework for a deal, and the recent British move to invalidate the withdrawal agreement between the two parties has poisoned the atmosphere for talks that will resume next week.
“We’re 100 days from the end of the transition period” between the UK and the EU … and any outcome that results in a free trade agreement is a better one,” said Bailey. Many economists believe that any breakdown in talks could provide the green light for a rate cut as soon as November.
The governor also applauded the job protection scheme implemented by the UK’s top finance official, Chancellor of the Exchequer Rishi Sunak. But he stopped short of calling for an extension to the government’s furlough scheme which expires at the end of next month. “I’m a very, very strong supporter of those measures. The question is, ‘What’s next?’ That’s an issue for the chancellor.”