The Bank of England has told lenders to get ready for potential future negative interests rates but stressed such a move was not imminent despite slashing 2021 growth forecasts.
In a highly-anticipated update on its consultation into the feasibility of below-zero rates in the UK, the Bank revealed it believed it was “appropriate” to begin preparations for adding negative rates to its toolkit in six months’ time.
It came as the Monetary Policy Committee (MPC) voted to keep rates on hold at 0.1% and keep its quantitative easing programme unchanged at £895 billion.
Forecasts alongside the decision showed the Bank slashed its UK economic growth outlook this year from 7.25% to 5% while increasing its prediction for next year from 6.25% to 7.25%.
The Monetary Policy Committee voted unanimously to keep #BankRate at 0.1% and to maintain the amount of quantitative easing at £895bn. https://t.co/lQh60YO9J2 #MonetaryPolicyReport pic.twitter.com/w4HeX1LHlp
— Bank of England (@bankofengland) February 4, 2021
It warned gross domestic product (GDP) – a measure of the size of the economy – is set to tumble by around 4% in the first quarter due to the third national lockdown.
However, it signalled the UK will avoid a double-dip recession, as defined by two successive quarters of falling output, predicting marginal growth at the end of 2020.
Many experts had wondered whether the Bank would push the rate into negative territory, or rule out such a move, in February’s update.
However, none of the MPC’s members voted to slash rates from their current levels.
Lenders had previously told the Bank of England’s Prudential Regulation Authority that it would take them around six months to implement the processes need to deal with negative rates.
— Bank of England (@bankofengland) February 3, 2021
Therefore, the MPC told banks they should start to prepare for a potential future move below zero, but stressed this should not be seen as a signal on the likelihood of such a decision being made.
Minutes of the latest decision showed policymakers were divided on whether to push ahead with the request as it might be misconstrued as a signal that negative rates “was in prospect, or even imminent”.
Some argued this could be mitigated through clear communication.
The Bank said: “While the committee was clear that it did not wish to send any signal that it intended to set a negative bank rate at some point in the future, on balance it concluded overall that it would be appropriate to start the preparations to provide the capability to do so if necessary in the future.
“The MPC therefore agreed to request that the PRA should engage with PRA-regulated firms to ensure they commence preparations in order to be ready to implement a negative bank rate at any point after six months.”