Cutting interest rates below zero is the last policy option that Bank of England officials would currently choose, according to Barclays.
Renewed asset purchases, potentially with a tilt toward riskier assets, are likely to be the central bank’s first choice, Barclays economists wrote in a report published Tuesday. They expect a further 100 billion pounds ($120 billion) of quantitative easing in June.
After that, the BOE could cut the Term Funding Scheme rate below zero for bank lending and ease accounting or capital rules to reduce the cost of making loans and bolster credit supply, the report said. Yield curve control, with explicit forward guidance to hold rates unchanged or lower over the foreseeable future would be the final option before moving to negative rates.
“In the current phase of the crisis, negative rates are not the answer,” the economists wrote. “The BOE is right to focus on quantitative easing policies and financial market functioning, de facto enabling the government to deploy its policy response to the virus without facing jumpy or adverse funding conditions on financial markets.”
The debate over whether sub-zero rates are the right response to the U.K.’s economic downturn has stepped up a gear in recent weeks, sending gilt yields tumbling as BOE officials emphasized they would rule nothing out. The central bank has already slashed interest rates to 0.1% and restarted bond buying to fight the crisis, which it says may tip the country into its worst downturn in three centuries.
So far, Barclays said, comments from policy makers suggest that while going negative is a potential option, they see no need to cut just yet and consider it a decision that would require careful consideration. However, the discussion implies that they see no specific technical issues that could not be negated.
Governor Andrew Bailey will likely shed new light on his thinking when he faces questions from lawmakers later on Wednesday, alongside his colleagues Ben Broadbent, Jon Cunliffe and Jonathan Haskel.