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BoE's Bailey re-thinking sub-zero rates, but says reviews are mixed

LONDON (Reuters) - Bank of England Governor Andrew Bailey said he was less opposed to negative interest rates than before the coronavirus crisis escalated, but that there were “mixed reviews” about how well they had worked for other central banks.

FILE PHOTO: Bank of England Governor Andrew Bailey poses for a photograph on the first day of his new role at the Central Bank in London, Britain March 16, 2020. Tolga Akmen/Pool via REUTERS

Bailey said the BoE was not ruling out taking rates below 0% for the first time, but it was “not ruling it in” either.

“(We’re) looking very carefully at the experiences of those other central banks that have used negative rates, and a number of them are actually publishing quite interesting assessments at the moment,” he told lawmakers on Wednesday.

“There are some pretty mixed reviews of it, I have to say.”

The Bank of Japan and the European Central Bank have cut rates below zero to deter banks from parking cash at the central banks and instead lend it out to boost growth.

Both have also recently sought to reward banks that use their credit lines, recognising the need for incentives.

Bailey said last week the BoE was not contemplating taking rates into negative territory but has sounded increasingly less opposed to the idea than his predecessor Mark Carney.

“I have changed my position a bit,” he told parliament’s Treasury Committee, saying the last time he spoke before the panel in early March seemed like “ancient history”.

But Bailey said the benefits of taking rates below zero might be limited and could hurt the financial system.

“There are good reasons to think that the pass-through would be different, it could be weaker,” he said.

Several other top policymakers have also left the door open, prompting investors to price in negative rates by the end of 2020.

Earlier on Wednesday, Britain sold debt with a yield below zero for the first time.

The BoE cut rates twice in March, taking them to a record low 0.1%, and ramped up its war-chest for buying bonds, most of them sold by the government as it seeks to prop up the economy.

Economists have said they expect the BoE’s next move will be to increase the size of its bond-buying programme next month.

Bailey said the BoE was reviewing its policy options because it might have to move quickly. But for now it wanted to observe how the economy responds to the March rate cuts.

“We’re very keen to observe and are observing how the economy responds to the cuts that we have made,” he said.

The central bank thinks the economy could shrink by a quarter between April and June due to the coronavirus lockdown.

How much long-term damage the economy will suffer is an open question, BoE policymakers told Wednesday’s committee hearing.

“There is no doubt that in our scenario the recovery is far from immediate and takes place over a longer period of time,” Deputy Governor Ben Broadbent said.

Bailey said Britain would need tools to allow companies to swap debt for equity in future as way to cope with their emergency borrowing to survive the coronavirus crisis.

Additonal reporting by Alistair Smout and Estelle Shirbon; Writing by William Schomberg; Editing by David Milliken and Catherine Evans

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