Bank of England Governor Andrew Bailey has said the central bank is not ruling out negative interest rates as a response to the Covid-19 economic crisis.
Bailey's comments to MPs appear to show him more open to the idea of negative rates than in previous remarks. BoE officials have given mixed messages on the subject in the past couple of weeks.
In remarks to Parliament's Treasury committee Bailey said: "We do not rule things out as a matter of principle. I mean that would be, I think, a foolish thing to do. But can I then follow that up by saying that doesn’t mean that we rule things in … We’re not ruling it in, but we’re not ruling it out.”
Bailey said the BoE's monetary policy committee had kept options under review since the financial crisis about what to do when interest rates hit the "zero bound". The MPC has cut the BoE's benchmark rate to 0.1% during the Covid-19 crisis and is considering what further actions it can take with the UK in a deep recession.
He said the MPC was monitoring the effect of negative rates in other countries but he added that all countries' economies and financial systems are different. He also reiterated his view that careful communication of such a departure from the BoE's standard actions was vital."
“The context in which negative rates are used is very important, the cyclical context," Bailey said, according to Reuters. "Secondly, the structure of financial systems in which they are done is important. Each country has a different structure... of its banking system. Thirdly I think the communication of it... would be absolutely critical."
On 14 May Bailey was reported to have said the BoE was not considering negative rates because doing so would raise problems for the UK's banks. He said cutting rates to less than zero would be a "big step". Those comments followed Deputy Governor Ben Broadbent's remark that zero rates could do more harm than good.
But the BoE's Chief Economist Andy Haldane appeared to open the door to negative rates at the weekend when he said: “It’s something we’ll need to look at – are looking at – with somewhat greater immediacy." Haldane said the BoE was also looking at other options.
Cutting interest rates to less than zero means banks effectively have to pay to deposit money with the BoE. This can hit bank profits and deter them from lending.