MNI POLICY: Negative Rates Live Issue For BOE: Tenreyro

-Tenreyro: Ready To Vote For Further Policy Action If Needed

-Tenreyro: Some Evidence On Negative Rates Encouraging  

By David Robinson

     LONDON (MNI) - The Bank of England is exploring the setting of negative

interest rates, Monetary Policy Committee member Silvana Tenreyro said

Wednesday, adding that she stood ready to back further policy action if needed.

     Speaking at the London School of Economics, she also raised questions about

how effective monetary policy is at present, saying "QE could be less effective

now because of low yields."

     Asked about setting a negative policy rate Tenreyro said "It is a live

issue at the Bank, we are conducting a review on negative rates and there will

be a decision taken by the MPC on whether to go for negative rates or not."

     The questions were whether they were feasible and if they were feasible

whether they would be the optimal policy response. 

     She said evidence from places that had implemented negative rates had shown

that "encouragingly they didn't lead to losses in profitability at banks, which

is the main fear for financial stability."

     --STALLED RECOVERY

     Tenreyro rejected the idea that the recovery was likely to be v-shaped,

instead arguing that it was likely to be interrupted before output returns to

pre-crisis levels, resulting in a lopsided V, or swoosh shape.

     She noted that the most recent GDP data suggested the economy had

contracted nearly 25% in the second quarter relative to the 2019 Q4 peak and the

speed of recovery would vary widely by sector.

     High unemployment is likely to lower aggregate demand as well as the hit

from voluntary social distancing and the risk of a second Covid wave.

     "On balance, these uncertainties suggest to me considerable downside risks

for demand relative to supply," Tenreyro said.

     "Putting this demand outlook together with the pre-existing weakness in

core inflation, we are likely to see disinflationary pressures for some time,"

she said.

     --JOBS RISK

     Unemployment has been cushioned by the Coronavirus Job Retention Scheme,

which has allowed workers to stay on the payroll and draw up to 80% of their

salaries without working.

     The CJRS, however, is set to end in October and Tenreyro said that "the

latest indications from the Bank's Agents suggested a further risk that many

furloughed workers would not be reabsorbed into employment as the scheme is

wound down."

     She concluded by warning about the limitations of monetary policy.

     "Lower gilt yields and higher asset prices induced by QE will lead to some

aggregate demand stimulus, although the low prevailing level of the yield curve

may reduce the impact somewhat, relative to some of the MPC's previous asset

purchase announcements," she said, adding that was ready to vote for further

policy action as needed. 

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

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