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Business & Finance

Bank of England's Saunders says floor for rates might be just below zero

  • Members of the BoE's Monetary Policy Committee have expressed differing views over the suitability for Britain of negative rates, which have been used in other European countries and in Japan.
04 Dec 2020

LONDON: Bank of England policymaker Michael Saunders said the floor for interest rates might be a "little below zero" and the BoE should be ready to pump more stimulus into the economy quickly if needed to recover from the coronavirus crisis or a Brexit hit.

The BoE is currently reviewing the operational feasibility of taking its benchmark interest rate negative, below its current level of 0.1%, and has consulted with banks about how such a move would effect their profitability.

"My judgment at present is that the ELB (effective lower bound) for the UK is probably a little below zero, provided appropriate mitigations (eg reserve tiering, bank funding scheme) are in place," Saunders said in a speech.

Members of the BoE's Monetary Policy Committee have expressed differing views over the suitability for Britain of negative rates, which have been used in other European countries and in Japan.

Saunders said the BoE would comment on its review "reasonably soon".

There might be some "modest scope" to cut the BoE's bank rate further but it would be preferable to move in "relatively small steps" and there was no firm evidence that the ELB floor was below -1%, given that no country has gone that low.

Britain's economy shrank by a quarter earlier this year as the country went into its first coronavirus lockdown and the BoE expects it will only recover its pre-pandemic size in 2022, slower than many other countries.

Saunders also said in his speech he thought the BoE should not worry about overdoing future stimulus and the central bank still had "quite a lot of scope" to expand its 895 billion-pound ($1.20 trillion) bond-buying programme if needed.

"Provided inflation expectations are well contained, it is better to err on the side of providing too much monetary stimulus rather than too little, in order to underpin prospects for a strong recovery in the economy," he said.

Since the BoE increased its bond-buying programme by 150 billion pounds in November, news about the development of COVID-19 vaccines has reduced some risks facing the economy.

"But we are not out of the woods yet, and there are some headwinds that could leave the economy stuck with persistently high unemployment and below-target inflation," Saunders said.

Uncertainties about Brexit, and how companies respond to changes to increased barriers to trade with the European Union, were another factor facing the British economy.

"If those downside risks develop, risk management considerations argue for a relatively prompt monetary policy response in my view," Saunders said.

He said that if more stimulus was needed "then, rather than lean ever more heavily on a single policy tool, in my view the most effective means may be to use a range of policy tools".