BOE Policymaker Back Negative Interest Rates

BOE Policymaker
Back Negative Interest Rates

Interest rates, in layman term, is known as the
cost of borrowing or the revenue for saving. In the financial market, central
banks’ interest rates are referred mostly to the interest paid or charged by
the bank to other financial institutions. The interest rate is also a common
policy tool used by central banks to control inflation. Central banks usually
lower interest rates to encourage higher spending activity and lessen savings,
vice versa. However, although negative interest rates have the same effect theoretically,
it is more complex in practice.

The complexity had confounded the Bank of England’s
(BOE) policymakers, especially during financial distress caused by the Covid-19
pandemic. Since the outbreak of the virus, the BOE slashed its interest rate to
a historical low of 0.10% to boost domestic spending and support the country’s
economy from plunging into a deep recession. During its policy meeting last
week, the BOE kept its interest rate unchanged, emphasizing that rates are to
remain at record low until the bank’s inflation objective of 2% is achieved.
Furthermore, Governor Bailey reiterated that although negative interest rates
remain a policy tool, it is not a suitable time for it.

However, an external member of the BOE’s Monetary
Policy Committee, Silvana Tenreyro, told UK news media the Sunday Telegraph
that evidence from other countries adopting negative rates shows encouraging
results. Evidence from European countries and Japan suggested that negative
rates can encourage higher borrowing by other financial firms while reducing
their financial pressures amid the Covid-19 pandemic. Tenreyro added that banks
had adapted well to negative rates, emphasizing the profitable potential that
comes with the policy introduction.

However, Governor Bailey claimed that the
experience from other countries are mixed, as the BOE would not hesitate to
adopt negative rates if it would benefit the overall economy. The BOE is still
monitoring closely on how negative interest rates might impact the economy if put
into practice for the last quarter of 2020.

Despite the bank’s persistence, policymakers are
now acknowledging the recent resurgence of Covid-19 infections in the country.
Last week, England announced restrictive measures to curb the virus spread, and
Tenreyro said that further local lockdown would potentially cripple the UK’s
economic recovery. Governor Bailey also urged caution over future downside
risks, stating that the BOE is ready to commit to all its powers to support the
country’s businesses and citizens.

Photo Credit: https://www.theguardian.com/