MNI INSIGHT: BOE Would Flag, Won't Surprise On, Negative Rates

-No Active Consideration By MPC Of Negative Rates, Yield Curve Control

-A Surprise Negative Rate Announcement Could Be Counterproductive

By David Robinson

     LONDON (MNI) - While the Bank of England is actively reviewing the

possibility of setting a negative policy rate, the Monetary Policy Committee has

yet to consider the matter and would clearly signal any move below zero well in

advance.

     BOE Governor Andrew Bailey said on May 20 he had changed his position on

setting rates below zero, which is now among tools "under active review", but he

noted also how such a policy would present communications challenges. The bank

fears a rapid cut to negative levels could backfire if savers were to withdraw

funds from banks, if unprepared banks were to curb lending, or if the move

further undermined confidence.

     As BOE Chief Economist Haldane observed on May 26, "reviewing and doing are

different things," and any move negative would be well flagged.

     --STAGING POSTS

     One potential signal would be a public change in the MPC's view of the

effective lower bound, or reversal rate, of monetary policy. While it has

shifted its view of the lower bound throughout the years, from around 0.5% to

near zero, this still remains positive.

     Research at the Bank, including that by Riccardo Masolo from Haldane's

Monetary Analysis division, which has been examining how negative rates have

fared in other jurisdictions, has suggested the lower bound varies through time.

     Following a public change to the perceived reversal rate, possible next

steps up the policy ladder would be for a discussion of negative rates to show

up in the minutes of an MPC meeting or for detailed analysis to figure in a

quarterly Monetary Policy Report, the next one of which is due in August.

     In order to avoid a hit to confidence, MPC members and others would start

making a positive case for a negative Bank Rate, explaining that it should not

feed through to negative savings rates or undermine confidence in an economic

recovery.

     Ahead of the June meeting, Bailey and colleagues have made it clear that

for the moment policy will focus on bulk gilt purchases and corporate bonds,

even if, with inflation likely to hit zero in the coming months, all options are

now open.

     Similarly, a formal yield curve control target, not obviously appealing at

a time when gilt curves are near flat, has yet to come under active

consideration.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: M$B$$$,M$E$$$,MT$$$$,MX$$$$,M$$BE$]