BANK of England boss Andrew Bailey has not ruled out cutting interest rates to below zero because it would be “foolish” not to consider the drastic move amid the coronavirus crisis.
The central bank governor told MPs that he was “actively reviewing” negative interest rates as one of its options to help the economy as it entered “unchartered territory” because of the pandemic.
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As part of this, he is examining their effect in other countries where central banks have already deployed the unusual measure.
A cut to below zero from the current interest rate low of 0.1 per cent could boost spending and lending – but would be a big squeeze on banks and savers.
Mr Bailey, who took over from predecessor Mark Carney in March, told the Treasury Select Committee yesterday: “We do not rule things out as a matter of principle.
“That would be a foolish thing to do. But that doesn’t mean we rule things in either.”
He added: “We know that we may have to draw on our tool kit at any point… having that whole tool kit under review and assessed as the context changes is important.”
Mr Bailey said the “level of uncertainty” around the economic fallout from Covid-19 made it hard to forecast how the recovery would take shape.
His colleague Ben Broadbent, the Bank’s deputy governor in charge of monetary policy, said the recovery may end up resembling a “lopsided V” – if that were the right shape to describe it at all.
Another deputy governor Jon Cunliffe said of the economic effects: “We don’t know where we are in the tail and what that tail looks like.”
The Bank is dealing with a “prolonged natural disaster”, he added.
Their comments come the UK enters a period of very low inflation, increasing the pressure for further monetary stimulus from the Bank of England.
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The Bank could choose to use more quantitative easing – an asset purchase programme likened to printing money – instead of a rate cut in the face of falling inflation. It next meets in June.
Yesterday official figures showed inflation had plunged to a near-four-year low of 0.8 per cent in April – far below the Bank’s 2 per cent target.
The UK has also just offered a negative yield to investors buying one of its conventional bonds for the first time ever.
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