BoE prepares contingency plans to set negative rates

The Bank of England announced on Thursday it would start preparing so that it could set negative interest rates within six months, but stressed this was not a signal that its monetary policy committee thought such a move was necessary.

Releasing its quarterly monetary policy report, the central bank said it wanted the ability to set a negative interest rate, but thought that this would not be needed because the economic outlook had brightened.

The MPC cut its short-term forecasts as a result of the current Covid-19 lockdown, but was more optimistic about the outlook for the second half of the year, which it assumed would be boosted by an easing of restrictions and the successful rollout of coronavirus vaccines.

It said that it still needed to complete the planned £150bn of additional quantitative easing in 2021, under which it creates money and buys government bonds, to keep inflation close to its 2 per cent target.

“Gross domestic product is projected to recover rapidly towards pre-Covid levels over 2021, as the vaccination programme is assumed to lead to an easing of Covid-related restrictions and people’s health concerns,” the BoE said in a statement after its policy decision.

The new forecasts showed the BoE thought the economy would now avoid a dip in the fourth quarter of last year, but the stricter lockdown since January would hit the economy hard, with it dropping another 4 per cent in the first quarter of 2021 before a strong recovery from the spring.

The 2021 growth forecast was revised down from 7.25 per cent to 5 per cent, but the BoE still thought that price pressures would build in the economy from the end of this year as the recovery strengthened, bringing inflation up to the 2 per cent target by the start of 2022.

There was no hint in the forecasts that the BoE would need to raise interest rates from the current low of 0.1 per cent at any time in the next three years to keep inflation on target.

To give the MPC more room to stimulate spending if the recovery is disappointingly weak, the BoE said that it had completed its technical review of negative interest rates, but the financial system would need six months to bring its computer systems into a position to implement them if the committee voted accordingly in a future meeting.

There was no sign in the minutes of the February MPC meeting that the committee thought negative rates would provide a significant stimulus or were needed in the current economic climate.

The minutes said: “While the committee was clear that it did not wish to send any signal that it intended to set a negative bank rate at some point in the future, on balance, it concluded overall that it would be appropriate to start the preparations to provide the capability to do so if necessary in the future.”