BOE SUGGESTS UK BANKS BETTER PREPARED FOR SUB-ZERO RATES THAN IN 2009

By Laurie Laird

LONDON (MaceNews) – British banks are are sufficiently capitalised to continue lending even if official rates eventually fall below zero, according to two Bank of England rate setters Friday.

Negative rates are most effective “when banks’ balance sheets are not under pressure for other reasons,” as was the case during the financial crisis, said Ben Broadbent, a member of the Bank of England’s Monetary Policy Committee.  

“Low rates compress margins … [banks] either don’t pass on cuts or … cut lending.  That’s why the MPC stopped at” 0.5% when slashing interest rates during the financial crisis that began in 2008. 

His colleague on the MPC, Dave Ramsden, stressed the current financial health of UK financial institutions.  Unlike in 2008, “banks have enough capital to be able to keep lending through this prolonged shock; it’s in their interest to do so … banks are part of the solution” to the current downturn.  Ramsden and Broadbent spoke at a virtual Bank of England Agencies Briefing Event, explaining the BoE’s Monetary Policy Report released on Thursday. 

With banks adequately capitalised, a reduction in interest rates from the current record-low of 0.1% is a “decision the [MPC] has to come to on economic grounds,” said Broadbent. 

While the MPC considers the efficacy of negative rates, the Bank’s Asset Purchase Programme remains a crucial tool in ensuring financial market stability, say rate setters. The Bank announced an £150 billion increase in its quantitative easing programme after Wednesday’s rate setting meeting, taking the total package to £875 billion. 

However, QE may be less effective than during the financial crisis, when market interest rates far exceeded pre-pandemic levels, said Broadband.  “Many aspects [of QE] are more moderate than they were because those yields were already low.”

However, the Bank will continue to purchase fixed income securities “for as long as our inflation target is unlikely to be met,” he added.  Asset purchases are designed “to meet our remit and nothing else.”   The Bank has failed to meet its 2% inflation target for over a year. 

The Bank has dramatically downgraded its growth forecasts in response to a second national lockdown that took effect earlier this week; staff economists expect output to contract by 2% in the final quarter, exerting a malign effect on the labour market.  

Ramsden noted a “material pick up in job losses,” adding that “unemployment is higher than allowed for by the official measure” of 4.5% in the three months to August.  Third quarter labour data are due next Tuesday.  Ramsden also stressed that the bank’s latest economic forecasts do not reflect the extension of the UK job support scheme announced on Thursday, which will cover 80% of furloughed workers’ salaries through March. 

Contact this reporter: laurie@macenews.com.

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