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Bank of England gives strong hint of negative interest rates

17 Sep 2020 / 23:37 H.

LONDON: The Bank of England (BoE) on Thursday gave its strongest hint yet that negative interest rates could be on the way as the UK economy battles against coronavirus and Brexit headwinds.

Following a regular policy meeting, the BoE said it had left its key interest rate at a record low of 0.1% amid low inflation and rising unemployment caused by Covid-19 fallout. The central bank also maintained its cash stimulus, or quantitative easing supporting the economy, at £745 billion (RM3.99 trillion), the minutes of its latest meeting showed.

Markets expect the QE amount to increase, however, before the end of the year.

"The outlook for the economy remains unusually uncertain," the BoE minutes stated, triggering fresh falls in the pound.

Sterling dropped 0.5% against the dollar "after the Bank of England delivered a dovish statement which included overt references to introducing negative rates", said Neil Wilson, chief market analyst at Markets.com.

The pound has already come under heavy selling pressure this month from the possibility that Britain and the European Union will fail to strike a post-Brexit trade deal. As well as the pandemic, Britain's future trading position with the EU is firmly in the BoE's sights.

"The path of growth and inflation will depend on the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom," the minutes stated.

"It will also depend on the responses of households, businesses and financial markets to these developments."

The BoE said it was exploring "how a negative Bank Rate could be implemented effectively, should the outlook for inflation and output warrant it".

The central bank said it would begin "structured engagement on the operational considerations in" the fourth quarter.

A negative interest rate would likely see retail banks further cutting their own borrowing costs, adding more pain to savers, but boosting borrowers.

Meanwhile, the BoE also ruled out tightening interest rates "until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2.0% inflation target sustainably".

Britain is far from achieving either target, having fallen into its deepest recession on record following its virus lockdown and with the country's inflation rate at a five-year low of 0.2%.

Unemployment is set to surge in the months ahead as the government ends in October its furlough scheme that has been paying the bulk of wages for millions of workers. – AFP

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