The Bank of England admitted for the first time it's considering negative interest rates, but analysts don't believe it will follow through

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The Bank of England admitted for the first time it's considering negative interest rates, but analysts don't believe it will follow through
A cyclist is seen near the Bank of England as the spread of the coronavirus disease (COVID-19) continues, London, Britain, April 14, 2020.Reuters/John Sibley
  • The Bank of England is now open to the idea of negative interest rates, Governor Andrew Bailey said, just days after it had ruled them out.
  • "We do not rule things out as a matter of principle," Bailey said during an appearance in front of a UK parliamentary committee.
  • The UK cut interest rates twice in March, from 0.75% to 0.25% and then to 0.10%, their lowest level in the bank's history.
  • Bailey's comments came as the UK government sold bonds, known as Gilts, at a negative rate for the first time in history.
  • Analysts, however, expressed skepticism about negative rates in the UK, with one saying: "I don't think he will pull that trigger."
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The Bank of England said it would be "foolish" not to consider interest rates and they are under now under "active consideration" in the current COVID-19 climate.

The dramatic change of stance comes only days after the Bank of England had ruled out the specter of negative interest rates.

But on Andrew Bailey, the Governor of Bank of England, told the UK's Treasury Select Committee on Wednesday: "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."

Bailey 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."

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He added that the Old Lady of Threadneedle Street is "looking very carefully at the experiences of those other central banks that have used negative rates, and a number of them are actually publishing quite interesting assessments at the moment."

The central bank already undertook two emergency interest rate cuts in March, from 0.75 to 0.25%, and then to 0.1% to protect the economy from the fallout of coronavirus.

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Bailey's comments came on the day when UK sold negative-yield bonds for the first-time in its 325 year history, and marked a major about turn from comments he made just last week, saying of negative rates: "It is not something we are currently planning for or contemplating."

The new governor, who started his job just as the coronavirus crisis was crystalizing in the UK, has taken a markedly different tone to his predecessor Mark Carney, who completely ruled out ever using negative rates while leading the central bank.

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The UK Debt Management Office sold £3.75 billion ($4.6 billion) worth of three-year gilts at a yield of -0.003% on Wednesday. The office saw demand for up to £8.1 billion ($9.9 billion) for the sale, reflecting the market's desire for safe-haven assets. This means investors are effectively paying to lend to the UK government.

Analysts think central bank will ditch the idea

But analysts don't think the central bank will actually choose the negative interest rate option in the end.

Neil Wilson, chief market analyst at Markets.com, said: "Andrew Bailey, the governor of the Bank of England, chose his moment well: just as he told MPs that the Old Lady is prepared to consider negative rates, a UK gilt auction delivered a negative interest rate on three-year paper."

He added: "The fact that the government can get paid to borrow money shows just how much central banks have already become 'the market' for sovereign debt.

"Getting out of a negative rate cycle is tricky and the Eurozone and Japan are hardly poster children of monetary policy success."

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Gregory Perdon, co-chief investment officer at Arbuthnot Latham, said: "I have yet to see any definitive proof that negative rates are effective and I suspect that the Bank of England will draw the same conclusion."

"In the fog of monetary war, all the rules seem to be fading away…Negative rates in the UK? I doubt it, but it is now firmly on the table."

"Do negative rates really filter down into the real economy? I'm not convinced. Bailey has made the right move by showing flexibility but in the end, I don't think he will pull that trigger," Perdon said.

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Naeem Aslam, chief market analyst at Avatrade, pointed out that the central bank's recent interest rate cuts have had a "muted impact" on the cost of new loans.

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He thinks the Bank of England will likely expand its asset purchase program in June or August instead until the end of November.

"If the economic weakness continues to linger, the bank will deploy all necessary measures. Until that time, it is expected that most of the work needs to be done by fiscal policies," Aslam added.

Read the original article on Business Insider
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