MNI POLICY: BOE's Tenreyro-Negative Rates Working In Europe

-Specific Financial Issues For Setting Negative Rate In UK

By David Robinson

     LONDON (MNI) - Every policy option is on the table for the Bank of England,

said Monetary Policy Committee member Silvana Tenreyro, adding that she thought

negative interest rates had been successful in continental Europe.

     The MPC so far has cut Bank Rate to 0.1% but has not taken the further step

of going negative. Tenreyro, at a London School of Economics event, acknowledged

that further work was needed before the MPC could implement negative rates, a

point made by BOE Governor Andrew Bailey.

     The following are points from Tenreyro comments in the LSE webcast and

question-and-answer session:

     -Asked if the MPC was considering setting a negative policy rate Tenreyro

said "The MPC has not ruled out any policy tool and, as always, we will be

evaluating the pros and cons of different policy actions and their effectiveness

in different phases of the crisis."

     "My personal view, which comes from the reading of the European

experiences, is that negative rates have had a positive effect in the sense of

having a fairly powerful transmission to real activity," she said.

     She stressed that there were other considerations for the UK including the

effect on financial institutions and the communications that would be required

before moving into negative territory.

     -The policy response going forward would depend on which of many plausible

scenarios unfolded and the more to the downside the longer stimulus would need

to be in place.

     "There will be major challenges in setting economic policy if the fall in

economic activity proves to be very persistent," she said.

     -The Covid-19 crisis was likely to exacerbate wealth inequality and this

could reduce the effectiveness of monetary policy.

     Lower income households would be less able to take on debt, she said,

adding that she was assuming "higher wealth individuals maintain lower marginal

propensities to consume."

     -Tenreyro also warned of negative spill-overs into sectors not directly

effected by the lockdown if health risks remained elevated, as activity declines

in the hardest hit sectors feed through into the wider economy.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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