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Friday, July 10, 2020

Negative rates in the UK “quite possible”: BOE’s Ben Broadbent

Simon Dawson | Bloomberg via Getty Images

The UK may be headed for negative interest rates in the Bank of England’s upcoming monetary policy meetings, according to Vice Governor for monetary policy Ben Broadbent.

The BOE’s Monetary Policy Committee (MPC) voted to keep interest rates at an all-time low of 0.1% last Thursday, having cut rates twice from 0.75% since the beginning of the coronavirus pandemic.

“The committee is certainly ready to do what is necessary to meet our mandate with still downside risks,” Broadbent told CNBC on Tuesday.

“Yes, it is quite possible that more monetary easing will be needed over time.”

Together with the two previous rate cuts, the Bank also announced £ 200 billion ($ 247.55 billion) of new quantitative easing (QE), bringing its bond purchase program to a total of £ 645 billion.

Broadbent said the potential to stimulate demand should be weighed against the impact on banks’ lending capacity, adding that “this is a question that has been thought about since the financial crisis.”

Banks are expected to continue lending

Broadbent told CNBC’s “Street Signs Europe” that the MPC’s decision that rates could drop as they are today was partly based on stronger balance sheets for banks and construction companies than after the global financial crisis in 2009. This would avoid the risk of doing “more harm than good” by discouraging financial institutions from borrowing.

Negative rates have been criticized by the financial community for actually hiring lenders to park cash at the central bank and hurt profits.

“That’s not to say that we stop thinking about this question, but that for the moment is where the rates have gone,” he added.

Broadbent reiterated Governor Andrew Bailey’s suggestion that it is in the interest of both the economy and the banks themselves to increase the supply of credit.

“There was a great need for companies to be able to overcome this problem with all the support that can be provided by both the government and the banks,” he said.

He added that the risk of some companies going into crisis with excessive debt becoming overburdened was largely offset by the risk that “good companies don’t get enough funds”.

BOE does not “finance the government”

Broadbent also sought to dispel suggestions that the BOE’s QE program is funding the government’s fiscal response to the coronavirus pandemic, insisting that the purpose of bond purchases is simply to achieve the Bank’s inflation target .

“It is not surprising that when there is great success in the economy, as in the present case, as in 2009, there is a slackening on both the fiscal and monetary front,” he said.

“This is the connection: both are the answers to a weaker economy. It is not the case that one is an answer to the other.”

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