—Tenreyro Sees Diminishing Benefit of QE as UK Output Contracts Sharply
By Laurie Laird
LONDON (MaceNews) – A top Bank of England rate setter forcefully endorsed the case for sub-zero interest rates, raising questions over the continued benefits of quantitative easing with UK output in the midst of another severe contraction.
“My overall assessment is that, while we can never have complete certainty, negative interest rates should with high likelihood boost UK growth and inflation,” said Silvana Tenreyro, an external member of the Bank’s Monetary Policy Committee, addressing a webinar organised by the University of West England on Monday. A noted dove, Tenreyro has expressed her support for negative rates over recent months but stressed that she was speaking in a personal capacity.
The Bank of England has been assessing the technical aspects of implementing negative rates and expects to report its conclusions as part of its February Monetary Policy Report. “Once the Bank is satisfied that negative rates are feasible, then the MPC would face a separate decision over whether they are the optimal,” said Tenreyro, adding that each of the nine MPC members “would have the option to vote on this at each meeting.”
Tenreyro drew on research from other jurisdictions that have implemented sub-zero rates, most notably the euro zone, where the main lending rate has stood at -0.5% since before the Covid contraction. “The financial-market channels of monetary policy transmission have worked effectively under negative rates in other countries, with some of the evidence pointing to more powerful effects,” she said.
Tenreyro countered concerns that negative rates might crimp bank lending, nothing that “a number of studies” have found that the economy-wide benefits of lower rates provided a boost to bank lending, even at lower margins.
She also downplayed worries – suggested by BoE Governor Andrew Bailey, among others – that the relatively high ratio of bank deposits in the UK financial system could decrease the effectiveness of negative rates in Britain. The structure of the banking UK banking system means means negative rates “could only make bank-lending channels slightly less powerful than otherwise.”
The verdict on negative rates could become even more vexed with the UK expected to suffer “headline-grabbing negative growth numbers” in the fourth quarter of 2020 and the opening three months of 2021, said Tenreyro, with much of the country in a strict lockdown that began in December and intensified at the start of the year.
Furthermore, asset purchase programmes may be nearing the end of their ability to revive economy-wide growth, she added. “I believe that quantitative easing is important in the event of market dysfunction, for example, but also that its power mainly lies in helping offset the disruption, rather than providing net additional stimulus to the economy.”
However, Tenreyro stopped short of pledging her vote for negative rates when the MPC next meets in early February. “My decisions on the amount of policy stimulus needed will depend on the outlook at the time of voting,” she said.
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Contact this reporter: laurie@macenews.com
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