BOE’s Haldane: None of Conditions for Negative Rates Now Satisfied

30 September 2020

By David Barwick – FRANKFURT (EconoStream) – None of the conditions necessary for implementing negative interest rates is currently satisfied, Bank of England Chief Economist Andy Haldane said Wednesday.

In remarks made for the Cheshire and Warrington LEP Economic Summit Webinar, Haldane, according to a text posted to the BOE website, suggested that excessively pessimistic concerns were supplanting positive real economic news.

The Monetary Policy Committee’s evaluation of the feasibility of a negative interest rate policy, ‘should this be required in future’, he said, ‘underlines the MPC’s commitment to having negative rates as a potential tool in the monetary policy toolbox.’

The minutes of the MPC meeting earlier in the month did not signal any near-term introduction of negative rates, despite some observers’ contrary interpretation, he said. The feasibility assessment ‘is likely to take a number of months’, after which a decision for negative rates will depend on whether the economic outlook warrants more accommodation, he said.

‘If that condition was satisfied, any decision on negative rates would then depend on whether the balance of costs and benefits from using this tool was positive and whether this cost/benefit balance favoured negative rates over other monetary tools’, he said. ‘All three of these conditions would need to be satisfied before negative rates became a reality. At present, none of those conditions is in my view satisfied.’

The current economic outlook is characterized by great uncertainty due to the resurgence of the pandemic; the policy response and the ramifications for activity and employment; and Brexit, he said. These risks ‘give good grounds for caution’, he said.

Haldane argued, however, that ‘[a]voiding economic anxiety is crucial to support the on-going recovery’, and emphasised that ‘[t]he speed and scale of the UK’s recovery has surprised to the upside, persistently and significantly, for at least the past four months.’

The better-than-expected developments reflect robust spending, he said. ‘The behaviour of UK consumers has been most surprising’, he said.  ‘As best we can tell, consumer spending now stands at around pre-Covid levels.’

To be sure, the economy has continued to shed jobs and investment remains clearly down, he said. Moreover, ‘storm clouds have recently begun re-gathering over the recovery’, he said, reminding of the risks. However, he said, these need to be put in perspective.

‘While recognising their gravity, my concern is that perceptions of these risks among household and businesses are, at present, exaggerated’, he said, which ‘has the potential to restrain unnecessarily the recovery.’

Haldane charged that ‘the prevailing popular economic narrative, among businesses and households currently, is unduly negative’, having ‘emphasized recession and risk over recovery and resilience. It has resulted in good economic news (of which there has been plenty) being discounted too readily, and fearfulness about the future being accentuated.’

The MPC will not withdraw accommodation without ‘clear evidence of progress being made towards reducing unemployment and returning inflation to target on a sustainable basis’, he said, and stands ready to act anew if warranted.