By Laurie Laird
LONDON (MaceNews) – Bank of England Governor Andrew Bailey declined Wednesday to rule out further reductions in lending rates, admitting that he has “changed his position” on sub-zero rates since mid-March.
Facing a question on negative rates posed by Felicity Buchan, a Conservative Member of Parliament serving on the Treasury Select Committee, Bailey said the bank is “not ruling it in and not ruling it out,” adding that “now is the time” to observe the experience of other central banks that have nudged lending rates below zero. However, Bailey acknowledged that lower lending rates can become less effective or even “counterproductive” as rates “get nearer to the lower bound.”
The Bank of England has cut rates twice since the onset of the economic crisis, leaving the benchmark rate at a record-low 0.1%.
Any move to sub-zero rates must be accompanied by enhanced communication with investors and savers, Bailey added, repeating comments he made at a web-event organized by the Financial Times on Monday. The governor also acknowledged that should the economy require extra stimulus, “we may have to act quite rapidly.” The Bank’s Monetary Policy Committee next meets on 18 June, but emergency cuts in March both occurred outside the committee’s regular meeting schedule.
Bailey’s comments come on the heels of a weaker-than-expected inflation report for April. Consumer prices rose by annual rate of just 0.8%, well below the bank’s 2.0% target. That requires the governor to write to the UK Treasury explaining a deviation of more than 1% from the government-mandated inflation target. An experimental measure of CPI, which excludes non-available items from the index basket, such as haircuts, fell to 0.6% in April.
The governor acknowledged that inflation will remain below zero for months to come, but dodged a question about whether he fears deflation, posed by Labour MP Angela Eagle, saying only that he’s “not worried about pernicious deflation … or debt deflation.”
The governor also acknowledged that the bank may need to enhance its quantitative easing program to include equity purchases or schemes to allow debt-for-equity swaps. “We’ve got to have options,” he said, although he ruled out a formal debt-for-equity swap scheme. But the bank is considering whether “we need more than the normal market tools.”
Bank of England officials have become somewhat less optimistic about the economic recovery over recent weeks, with Deputy Governor Ben Broadbent repeating warnings that an upturn will be “far from immediate,” and expressing fears of “permanent scarring” to consumer demand.
However, Broadbent noted that high-frequency data monitored by the MPC such as credit card data, suggest that the plunge in consumer spending is currently “marginally less lower” than expected. “But that doesn’t tell you much about the medium-term scenario,” he added. Governor Bailey also acknowledged that the 2.0% contraction in first quarter gross domestic product was “stronger than we expected.”