MNI STATE OF PLAY: BOE Plays Down Likelihood Of Negative Rates

The Bank of England told banks to get ready for negative rates in six months' time but shied away from signalling it would actually go ahead and cut below zero.

With BOE forecasts showing inflation set to come in just above target on unchanged policy, the wariness of some on the Monetary Policy Committee to signal cuts ahead suggested the scales have tilted away against negative rates being adopted in this cycle.

A report from the BOE's regulatory wing, the Prudential Regulation Authority, on banks' readiness to implement negative rates concluded that there would be operational risks if they were introduced too quickly. The Monetary Policy Committee opted to tell the PRA to instruct banks to start getting ready, though members were split over the risk that this would be seen as signalling a cut below zero was on its way.

While some external MPC members have gone public about the likely benefits of negative rates, insiders have been either silent or sceptical and this division showed up in the MPC's response to the PRA report.

"There were a range of views on how the MPC should respond to the (PRA) findings …on balance, it concluded that it would be appropriate to start the preparations," Governor Andrew Bailey said in opening remarks at the press conference.

All members supported the decision to leave Bank Rate on hold at 0.1% and its asset purchase target unchanged.

TIGHTENING STRATEGIES

The BOE also announced, at the end of the minutes, that Bank staff would consider strategies for tightening monetary policy. The BOE last revisited its approach to tightening back in June 2018, under former governor Mark Carney, and concluded that a QE unwind would only begin when Bank Rate hit 1.5%.

Bailey is open to the idea of starting asset sales earlier. Items on the menu for the staff review will doubtless include starting a QE unwind before hiking Bank Rate and allowing natural run-off, with maturing gilts in the BOE's stock not being replaced.

At the press conference Bailey stressed that the review was being undertaken with an open mind.

"This is not a policy signal. Like negative rates, it is a toolbox move," he said.

This year's national anti-Covid lockdowns led the BOE to clip its 2021 GDP forecast to 5% from 7.25%, while it raised its 2022 forecast to 7.25% from 6.25%. It slightly improved its GDP forecast for 2020 to -10% from -11%.

Inflation was shown rising to a sliver over the 2.0% target on unchanged rates, and to 2.11% on the market rate curve, which has Bank Rate dipping into negative territory.