The Bank of England can probably cut interest rates slightly below zero, and it should be ready to pump more stimulus into the economy quickly if needed to recover from the coronavirus crisis or a Brexit hit, BoE policymaker Michael Saunders said.
“In my view, there may be some modest scope to cut Bank Rate further but, if we do, it may be preferable to move in relatively small steps,” Saunders said in a speech on Friday.
The BoE is reviewing the feasibility of taking its benchmark rate negative from its current level of 0.1 per cent. It has asked banks about whether that would hit their ability to lend.
“My judgment at present is that the ELB (effective lower bound) for the UK is probably a little below zero, provided appropriate mitigations (eg reserve tiering, bank funding scheme) are in place,” Saunders said.
The BoE’s nine rate-setters have expressed differing views over the suitability for Britain of negative rates, which have been used in other European countries and in Japan.
Recent news about the development of COVID-19 vaccines has reduced some risks facing the economy.
“But we are not out of the woods yet, and there are some headwinds that could leave the economy stuck with persistently high unemployment and below-target inflation,” Saunders said.
Uncertainties about how companies respond to barriers to trade with the European Union were another factor facing the economy.
“If those downside risks develop, risk management considerations argue for a relatively prompt monetary policy response in my view,” Saunders said.