BOE’s Bailey: Preparation for NIRP Implies Nothing About Our Intentions

8 March 2021

By David Barwick – FRANKFURT (Econostream) – The fact that the UK’s banks have been asked to prepare for the possibility of negative interest rates does not imply anything about what course the Bank of England’s monetary policy will take, BOE Governor Andrew Bailey said Monday.

In a speech given online for the Resolution Foundation and posted to the website of the BOE, Bailey noted that banks had been asked to prepare for NIRP over the next six months ‘in case we need to use negative interest rates to provide further support.’

‘This implies nothing about our intentions in that direction, and nor does it imply that negative rates are our chosen marginal policy tool, something that in my view is state contingent at all times’, he said. ‘We also signalled that the Bank will do work on the approach it would take to tightening policy, should that be needed, again recognising that it has more than one tool to do so.’

‘These decisions are detached from our current or likely future policy decisions, but do recognise the increasingly two-sided nature of the risks we face, as we hope and expect to see the economy get over Covid’, he added.

Bailey took note of the ‘growing sense of economic optimism, in markets and in consumer and business confidence measures’ and said there was ‘light at the end of the tunnel’.

The economy would recover more quickly, albeit from a lower starting point, he said. ‘There is good news in that projection, with a rapid recovery later this year, and inflation returning to around our 2% target.’

Monetary policy is supportive of the recovery, which ‘amply justifies our current stance on monetary policy’, he said.

Bailey repeated the MPC’s intention to continue buying assets as announced until around the end of the current year, as well as the forward guidance promising ‘whatever additional action is necessary’ and suggesting policy tightening would not occur ‘at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably’.

The risks to the recovery ‘are still on balance distributed on the downside, though less so as time goes by’, he said. The MPC has a ‘burden of proof’ to satisfy regarding the recovery’s sustainability, he said.

The relative stability of inflation expectations is ‘encouraging’, he said.