The severity of Britain’s economic downturn could force the Bank of England to increase its stimulus, according to one of the central bank’s senior officials.
Ben Broadbent, deputy governor for monetary policy, said it was “quite possible” officials would vote to expand the quantitative easing (QE) programme to prevent the situation worsening as businesses remained closed and millions of workers were forced to stay at home.
The Bank’s monetary policy committee voted to hold interest rates at a historic low of 0.1% last Thursday, having cut rates twice from 0.75% since the start of the coronavirus pandemic. Officials also voted by seven to two to reject a proposal for a £100bn increase in the bank’s stimulus from £645bn to £745bn.
But a warning by the Bank that the British economy could shrink by 14% this year and that unemployment could more than double by spring has increased speculation that a further interest rate cut to implement the UK’s first negative interest rates, or an increase in QE is imminent.
Broadbent dismissed the likelihood of negative rates, before saying: “The committee are certainly prepared to do what is necessary to meet our remit with risks still to the downside. Yes, it is quite possible that more monetary easing will be needed at the time.”
Broadbent is known to believe the knock-on effects of negative interest rates undermine any potential benefits, especially by potentially discouraging high street banks and building societies from lending to businesses and households .
When a central bank adopts negative interest rates, they charge high street banks to keep cash with them, rather than paying them interest, forcing the high street banks to use the funds as loans to businesses and households.
His comments were followed by a demand from Donald Trump that the US Federal Reserve introduce negative interest rates. Referring to the 19 countries in the eurozone, Trump tweeted: “As long as other countries are receiving the benefits of Negative Rates, the USA should also accept the “GIFT”. Big numbers!”
The White House has spent the past two years berating the Federal Reserve for its refusal to copy the European Central Bank and push down interest rates to below zero. Many of the president’s supporters believe the economy would recover more quickly if borrowing costs were lowered.
Kenneth Rogoff, a professor of economics at Harvard University, argued earlier this week that the dire situation facing the developed world from deep recessions this year meant central banks must use all their tools, including negative interest rates.
Rogoff, a former chief economist of the International Monetary Fund, said: “Tragically, when the Federal Reserve conducted its 2019 review of policy instruments, discussion of how to implement deep negative rates was effectively taken off the table, forcing the Fed’s hand in the pandemic.
“Influential bank lobbyists hate negative rates, even though they need not undermine bank profits if done correctly. The economics profession, mesmerised by interesting counterintuitive results that arise in economies where there really is a zero bound on interest rates, must share some of the blame.”
Broadbent also sought to dispel suggestions that an overdraft facility for the Treasury financed by the Bank of England amounted to the central bank directly financing government spending. He insisted that the purpose of the bond purchases was to satisfy shortages of funds in the financial system and meet a 2% inflation target.
“It is not surprising when you have a huge hit to the economy, as is the case now, as was the case in 2009, that you see easing on both fiscal and monetary fronts,” he said. “That is the connection – they are both responses to a weaker economy. It is not the case that one is a response to the other.”