Bank of England governor Mark Carney may be forced to eat his words, and backtrack on his adamance that the UK’s central bank will not introduce negative interest rates during his tenure, according to analysts from Credit Suisse.
Since Carney took over as governor in 2013, the monetary landscape has changed dramatically. Back then, the idea of negative interest rates was just that, an idea. Fast forward 3 years, and the eurozone, Sweden, Denmark, Switzerland, and Japan all have rates below zero. Britain’s interest rate is now at a record low of 0.25%, and the possibility of negative rates has been widely mooted for the country.
Carney however, is adamant that Britain does not need negative interest rates, and has argued that they are actually damaging to the economies where they are in place. As Credit Suisse puts it:
“If the subject of Justin Bieber’s song ‘Never say Never’ were about negative interest rates in the UK, fellow Canadian Bank of England Governor Carney might not agree. One clear and repetitive message from Carney’s press conference last week was the MPC’s unanimous belief that the lower bound is ‘slightly above but not below zero.'”
In his press conference following the BoE’s rate cut last week, Carney completely ruled out Britain seeing a negative bank rate, saying: “I’m not a fan of negative interest rates. We’ve seen the consequences of them in other financial systems. We have other options to provide stimulus if more stimulus is needed so we don’t need to go to that resort.”
He added that the MPC sees the effective lower bound as “a positive number close to zero.”
Asked several times about the potential for crossing the so-called “zero lower bound” he eventually replied: “We’re not intending to move to negative interest rates. At least, I’m not intending to move to negative interest rates.”
“Take that off the table from me.”
That is pretty much as unequivocal as you get from a central banker. Carney has drawn a line in the sand.
However, in Credit Suisse’s FX Compass note, analyst Bhaveer Shah argues that despite Carney’s insistence, he may be forced to give in to the lure of passing the zero lower bound. Shah then goes on to list 10 different reasons why this might be the case. Check them out below:
- The British economy is far too unpredictable right now to rule anything out.
- The idea of “never” is a temporary concept for the world’s central banks. As Shah notes: “In 2010 ECB QE/corporate bond buying was unfeasible. In 2015 the MPC was adamant the next UK rate move would be higher; not an ultra-dovish cut with QE. Kuroda shunned negative rates in Japan just days before BOJ cut negative.”
- The Monetary Policy Committee may be trying to manage expectations: “We believe part of the reason why a shrewd Bank of England may want to appear so shut to even discussing negative rates may just be to avoid fuelling market expectations — especially before Brexit effects become clear.”
- Negative interest rates are not a “one-size fits all” policy, and can be tailored to “ameliorate the most feared consequences” associated with them.
- Rate cuts are more powerful in the UK than in the rest of the world. Some structural factors about the UK economy suggest to us that interest rates have a faster and cleaner transmission to households than in other places.
- QE could hit trouble pretty rapidly. The bank has already struggled to buy all the gilts it wants in its first two days of bond buying, and therefore, alternative policies may be needed. As Shah notes: “Relying on any one policy alone (like QE) also creates its own set of problems.”
- High inflation isn’t necessarily a reason to avoid negative rates. With sterling crashing, one of the biggest fears facing the MPC is the worry that inflation could get out of hand, but the BoE shouldn’t worry about that Credit Suisse argues. “A deeper recession could still see slowing demand drag down underlying inflation at a time when headline inflation rises.”
- Loose fiscal policy will not necessarily solve all evils in future. New Chancellor Philip Hammond is expected to announce new fiscal easing at the Autumn Statement, but that may not be a panacea for the economy’s problems. “If fiscal policy no longer takes the pinch, BOE may have little option but to eventually fill the gap.”
- Negative rates could speed up the rebalancing of the British economy. “For the UK, a carefully designed surprise negative rate scheme may have limited direct impacts but could be a strong signal that policymakers now want to see pound weaken at a faster pace,” Shah argues.
- If things get worse than expected, the Bank of England may simply be forced to send a “dovish signal.” “If the UK’s recession is deeper and longer than expected, the BOE may simply have few options but to open the door to further easing,” the note points out.
The reasons that Carney and the rest of the MPC may be forced are compelling, but Credit Suisse points out that, as it stands, the bank’s base case remains that negative rates won’t be needed, saying:
“We believe the arguments we make above for negative rates are still outweighed by the ample and well-understood reasons against negative rates in the UK. But the debate is certainly not as straightforward or binary as the BOE has made it to sound this week. The situation is simply too fluid for ‘never saying never.'”