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A no to negative rates

Thursday, February 04, 2021

Was 4 February the day that the Bank of England (BoE) ventured down the rabbit hole of negative interest rates? Thankfully not. It has been seen as a growing likelihood among investors that this peculiar Japanese and European experiment will at some point be adopted by the BoE, but for now its adoption has been delayed again fortuitously and indeed the BoE was quite keen in communicating that it does not intend to send the signal that negative rates are coming. All nine members of the committee voted to maintain rates at the current policy rate of 0.1% and the total asset purchase target stays at GBP 895 billion. 

The UK economy will clearly feel a sharp drop in output in Q1 as the ongoing lockdown restricts business activity and this was highlighted in the BoE’s outlook. It sees the economy shrinking 4% in the quarter but encouragingly it also sees a sharp rebound into Q2 as the vaccine rollout intensifies and a degree of normalcy returns. 

This wait and see approach is probably a better course of action than stumbling into the many pitfalls of negative rates and all that brings to the financial sector. The BoE did, however, forecast that an inflation bump is coming sometime down the line and nearer to their 2% target in two years’ time and that is pushing down long end gilt prices following the announcement. 

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