Negative rates seen as all talk despite Bank of England prep work

Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
·3-min read
Bank of England in London. Photo: Matt Dunham/AP
Bank of England in London. Photo: Matt Dunham/AP

The Bank of England is unlikely to introduce negative interest rates anytime soon, City experts think, despite the central bank ordering commercial lenders to prepare for the possibility of rates falling below zero.

The Bank of England on Thursday told bank chief executives to be ready for negative interest rates within six months after almost a year of flirting with the policy. Rate setters cut the UK’s interest rate to 0.1% last year, leaving them little downward room to manoeuvre.

Despite Thursday’s announcement, expectations of an imminent rate cut have in fact faded. Experts said the wording of the Bank of England’s announcement suggested it didn’t intended to use negative rates but simply wanted the policy available as a possible last resort.

READ MORE: Bank of England tells banks: Be ready for negative rates in six months

“Sterling has rallied, gilt yields rose and bank shares are up in the wake of the Bank of England’s decision, in which it sought so hard to push back on negative rates that it actually delivered a rather hawkish message,” said Neil Wilson, chief market analyst at Markets.com.

WATCH: What are negative interest rates and how do they work?

The Bank of England’s Monetary Policy Committee (MPC) stressed in its minutes that the prep work should not be taken as “any signal that it intended to set a negative Bank Rate at some point in the future.” The phrasing suggested “limited enthusiasm for negative rates,” said James Smith, an economist at ING.

“The meeting minutes contain no less than seven references to the fact that the committee doesn’t want us to interpret this as a signal that negative rates might be on their way,” Smith said. “To us, this makes it abundantly clear that – as things stand – negative rates are unlikely to be used this cycle.”

Bank of America agreed that negative rates now look like a “marginal tool.” Morgan Stanley said Thursday’s update made negative rates “less likely” and Goldman Sachs said there was now a “low” likelihood of them being deployed this year.

READ MORE: Bank of England: UK economy will 'recover rapidly' thanks to vaccines

“We believe the message is clear: the plan is for negative rates to be incorporated into the Bank’s toolkit, but don’t expect anything any time soon and economic conditions would probably need to be meaningfully worse for this policy to be deployed,” said George Buckley, Nomura’s chief UK and European economist.

Part of the reason negative rates are seen as less likely is because of the economic message delivered alongside the instructions for prep work. The MPC on Thursday downgraded forecasts for the first quarter of 2021 but predicted the UK economy would “recover rapidly” towards the later part of the year thanks to the successful rollout of COVID-19 vaccines.

“As ever, signals on future policy intentions are embedded in the MPC's forecasts and, on this score, it is clear the Committee has no intention of making monetary policy more stimulative this year,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

If the Bank of England’s forecasts turn out to be too optimistic, as they have in the past, negative interest rates could be reconsidered. For now though, it looks like negative rates will simply be placed in the toolbox when the policy is ready in August.

WATCH: Will interest rates stay low forever?