BOE policymaker says banks can cope with more pressure from negative rates

Suban Abdulla
·3-min read
Last week, BOE launched official talks with the Prudential Regulation Authority over the operational practicalities negative interest rates, hitting the pound. Photo: Getty
Last week, BOE launched official talks with the Prudential Regulation Authority over the operational practicalities negative interest rates, hitting the pound. Photo: Getty

A Bank of England (BOE) policymaker has said that an investigation into whether negative rates might help the UK economy through its current downturn found “encouraging” evidence from other countries.

Silvana Tenreyro, defended the potential use of negative interest rates, which could take the cost of borrowing below zero, in an interview with the Sunday Telegraph.

“There has been almost full pass-through of negative rates into lending rates in most countries,” she said.

Tenreyo, who is an external member of the Bank’s Monetary Policy Committee, said that banks would be able to handle further pressure on their finances.

“Banks adapted well – their profitability increased with negative rates, largely because impairments and loss provisions decreased with the boost to activity and the increase in asset prices.”

The policymaker also added that she doesn’t expect the UK economy to make a fast V-shaped recovery as rising coronavirus cases have forced local lockdowns and nationwide restrictions and rising unemployment. Instead she predicts Britain’s recovery will be shaped more like an “incomplete V.”

According to Tenreyo, evidence from the Eurozone and Japan showed that taking interest rates below zero had succeeded in reducing firms’ borrowing costs and did not make it unprofitable for banks to lend.

BOE launched official talks with the Prudential Regulation Authority over the operational practicalities negative interest rates, hitting the pound, last week.

READ MORE: Bank of England stokes negative interest rate speculation

Negative interest rates, also known as BOE’s base rate, measures how much interest the Bank pays to financial institutions that hold money with it, and what it charges them to borrow.

So far, BOE has been using quantitative easing (QE) and forward guidance instead of rate cuts, to boost Britain’s economy.

Policymakers have been touting the idea of taking interest rates negative for the first time in British history. Governor Andrew Bailey said earlier in September that negative rates were “in the box of tools” but said the Bank had “no plans to use it imminently.”

But, negative rates isn’t the only consideration for the Bank, it is also weighing the potential impact of a no-deal Brexit transition period, which could force policymakers to add more stimulus.

It comes as the central bank left policy unchanged, last week but warned the UK economy was in a precarious position as COVID-19 cases rise and the government’s furlough scheme draws to a close.

BOE’s policy setters kept interest rates at record low levels of 0.1% — the lowest they can go — and maintained the Bank’s programme of bond buying at £745bn ($966.6bn).

In August, Britain’s economy suffered its largest-ever contraction and officially entered a recession in the second quarter, as the COVID-19 lockdown took a heavy toll on economic activity in the country.

UK’s economic output declined by a record 20.4% between April and June, according to data from the Office for National Statistics (ONS).

READ MORE: Coronavirus: UK economy officially enters recession after record 20.4% contraction