— Leaves rates, QE Programme Unchanged After February Rate-Setting Meeting
By Laurie Laird
LONDON (MaceNews) – The Bank of England has asked UK financial institutions to begin a six month preparation period in the event the UK economy requires the additional stimulus of a sub-zero base rate.
The Bank’s Monetary Policy Committee “concluded that it would be appropriate to start the preparations, in order to provide the capability to so implement a negative bank rate if necessary in the future,” said Governor Andrew Bailey in prepared remarks following the announcement of the MPC’s deliberations at a rate-setting meeting on Wednesday.
However, the governor took pains to stress that preparations for negative rates are not an indication that rates will definitely fall below zero. “No one should take any signal from this,” he told reporters.
The instructions to financial institutions follow an assessment of banks’ operational readiness to process assets carrying negative interest rates, which concluded that a preparation period of less than six months could “adversely impact some firms’ safety and soundness,” according to minutes of the latest meeting.
The Bank left rates unchanged at a record low of 0.1% and maintained its quantitative easing programme at £875 billion, with the “flexibility to slow the pace of purchases later.” All nine members of the MPC agreed to to retain the policy stance.
However, the MPC envisions a somewhat faster recovery than many private economists, raising questions about the likelihood of sub-zero rates in 2021. Bank staff forecast GDP growth of 0.5% in the final quarter of 2020, compared to a 0.7% contraction in the eurozone and a 1.0% decline in the U.S.
Over the fourth quarter, “many of the numbers on the economy have turned out to be stronger than we expected” as consumers have “adapted” to Covid restraints, said Bailey. October-to-December GDP data are due on 12 February.
Britain’s exit from a transitional trade agreement with the European Union at the start of the year is likely to knock 1% from GDP in the first quarter, according to the minutes. The MPC noted anecdotal evidence of weak freight volumes since January, even accounting for seasonal patterns, but was unable to conclude whether that softness was due to pre-Brexit stockpiling or post-Brexit trade frictions. Those issues, combined with stronger Covid restrictions imposed at the end of 2020, are likely to push GDP down by 4% in the first quarter.
The MPC also asked Bank staff to assess previous guidance on “the appropriate strategy for tightening monetary policy should that be required in the future,” according to minutes of Wednesday’s meeting. But Governor Bailey stressed that the inclusion of such language was simply “contingency planning,” and not intended as a signal that a withdraw of monetary stimulus is imminent.
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Contact this reporter: laurie@macenews.com.
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