BOE’s Haskel: Need to Avert Downside Risks; Banks Should Prepare for NIRP

5 March 2021

By David Barwick – FRANKFURT (Econostream) – The situation of the UK suggests that monetary policy needs to head off risks to the economy that are largely on the downside, Bank of England MPC member Jonathan Haskel said Friday.

In a speech given for a webinar of the Centre for Economic Policy Research and The University of Chicago Booth School of Business, a text of which was posted to the website of the BOE, Haskel stressed the importance for banks of preparing for a cut in Bank Rate.

‘[I]t is my view that risks to activity remain skewed to the downside’, he said. ‘As I have consistently argued, risk-management considerations dictate that policy should lean strongly against downside risks to the outlook and I remain open to the possibility that the economy might need further support to return inflation to the target sustainably.’

This means averting tighter monetary conditions that would impede the restoration of inflation, he said, and ‘being ready to deploy, as and when needed, all the tools available to the MPC.’

For this reason, Haskel said, he supported having the Prudential Regulation Authority continue to ensure that financial services companies are ready for negative interest rates.

‘It is prudent for banks to start preparations regardless of the currently desired policy stance, for that is what it means for a negative Bank Rate to be in the MPC’s monetary policy toolkit’, he said.

At last month’s meeting of the MPC, Haskel said his and others’ feeling was that the vaccine rollout and the worsening near-term public health situation offset each other, so that ‘[t]hedecision to leave policy unchanged was consistent with our guidance not to tighten monetary policy at least until there was  clear evidence that significant progress was being made in eliminating spare capacity and achieving the 2% inflation target sustainably.’

The supply outlook is balanced, he said, though scarring could be worse if near-term challenges are not met successfully. Although the MPR anticipates entering a temporary situation of excess demand next year, there was ‘relatively little risk of sustained above-target inflation over this period’, he said.