MNI INSIGHT: More QE, No Negative Rates, In BOE Brexit Toolbox

The results of the Bank of England's consultation on negative rates may not see the light of day this year, leaving additional quantitative easing as the main item in its toolkit in case of any fresh shock such as financial stress caused by a no-deal Brexit, MNI understands.

With investors largely positioned for a trade deal with the European Union even as negotiations go down to the wire, there are risks of a rapid re-pricing of sterling assets. When markets hit severe turbulence in March, the BOE showed that it can, in the words of Governor Andrew Bailey, "go big and go fast" if need be. If another swift response to a shock were to be required, the option of fresh asset purchases would be back in the spotlight.

Monetary Policy Committee members agree that QE is effective if markets are stressed, when the central bank can act as market maker of last resort, supplying safe assets, bank reserves, and helping curb any rise in yields. Reservations about the effectiveness of additional asset purchases, expressed by various MPC members, including independents Michael Saunders and Gertjan Vlieghe, have focussed on periods when yield curves are near flat and markets liquid.

NEGATIVE RATES ANALYSIS

And market disruption could follow a no-deal Brexit, Dave Ramsden, Deputy Governor for Markets and Banking, said at Nov. 17 question-and-answer session, although he added there should be no wider financial stability shock.

Meanwhile, the joint consultation by the Bank and the Prudential Regulation Authority with financial sector institutions on the practicalities of zero and negative policy rates had a closing date of Nov. 12 but the full analysis is far from certain to be ready before 2021, MNI understands.

The Bank would be reluctant to publish the results as part of its Dec. 11 Financial Stability Report. This would send the unwanted message that negative rates were a consideration for financial system stability when research suggests that any damage they do to banks' net interest margins is compensated by lower losses from bad loans.

The next set piece date for the Bank after the stability report is the release of the Dec. 17 policy decision and MPC meeting minutes. December would normally be an interim meeting, with no press conference and no Monetary Policy Report, with the latter being the preferred vehicle for detailed analysis of policy options.