BOE’s Tenreyro: Negative Rates Would Likely Boost UK Growth, Inflation

11 January 2021

11th January 2020 By David Barwick – FRANKFURT (Econostream) – A negative interest rate policy (NIRP) should be beneficial overall for UK economic growth and inflation and should be part of the Bank of England’s policy toolkit, Silvana Tenreyro, External Member of the BOE’s Monetary Policy Committee, said on Monday. Speaking at a UWE Bristol webinar, Tenreyro, according to a text of her remarks made available by the BOE, said that her ‘overall assessment is that, while we can never have complete certainty, negative interest rates should with high likelihood boost UK growth and inflation.’ The cuts in Bank Rate to its current 0.1% level have led to easier financing conditions, she said, ‘and I believe further cuts would continue to provide stimulus.’ Although the UK experience could involve ‘slightly less stimulus’ via bank lending than in other countries, ‘I would consider it as very unlikely that we do not see any boost to lending’, she said. Moreover, she said, ‘[t]here is little reason to suspect that the financial market channels of monetary policy, which our models suggest are quantitatively important, would operate differently to normal.’ Evidence from advanced economies that have instituted NIRP ‘suggests that negative rates can provide significant stimulus’, she said. Negative rates do not impede financial market channels, some of which ‘may even be stronger than usual’ under NIRP, she said. Moreover, though household deposit rates may be less likely to sink below zero under NIRP, corporate deposit rates are not, which could induce companies to spend, she said. There is, furthermore, ‘strong evidence of transmission into looser bank lending conditions’, she said. Objections to NIRP on the basis of bank profitability are not backed by any ‘clear evidence’, she said, and in fact, some studies find a net positive impact on banks’ bottom line, once the economic impetus of NIRP is considered. It is ‘crucial’ for the MPC to have at its disposal ‘other policies that are able to effectively boost spending and inflation when needed’, she said, given the likelihood of continued low longer-term borrowing costs. There is also little reason to think that productivity growth will return to above 2%, she said. And even if vaccination against Covid-19 should gradually reduce risks, how companies and consumers perceive tail risks could remain affected, she said. Climate change could be an additional source of downward pressure on risk-free interest rates, she added. Tenreyro noted central banks’ increased reliance since 2009 on nonstandard policies like quantitative easing and forward guidance to keep down longer-term interest rates. ‘However, when long rates are already very low as they are now, and markets are functioning smoothly, my view is that it is difficult to reduce long rates any further, so there is little further stimulus to be gained from these tools’, she said. QE is nonetheless useful in cases of market dysfunction, she added, though ‘its power mainly lies in helping offset the disruption, rather than providing net additional stimulus to the economy.’ The BOE’s talks with firms about ‘operational considerations regarding the feasibility of negative interest rates’ is still ongoing, she said. ‘Once the Bank is satisfied that negative rates are feasible, then the MPC would face a separate decision over whether they are the optimal tool to use to meet the inflation target given circumstances at the time’, she said. Turning to the economic outlook, Tenreyro said this depended ‘overwhelmingly’ on the evolution of the pandemic. The near-term outlook is worse than had been expected in November, though the recovery ‘later in 2021’ is now subject to less uncertainty, she said. ‘All else equal, looser monetary policy can help the economy recover faster, bringing inflation back to target, while also preventing some of the job losses and business failures that could otherwise reduce potential output in future’, she said. Noting the MPC’s promise not to tighten monetary policy without ‘clear evidence that significant progress is being made in eliminating spare capacity and achieving the inflation target sustainably’, she said it was ‘possible that more stimulus be needed to do so at an appropriate pace.’ ‘If that is the case, having negative rates in our toolbox will, in my view, be important’, she added.