Bank of England holds rates, and would need half a year for negative rates
The Bank of England (BoE) has today left interest rates on hold at 0.1 per cent and its bond-buying programme at £895bn.
The BoE’s Monetary Policy Committee (MPC) voted unanimously to keep rates at record-low levels.
It also confirmed that it would take six months for banks to get ready for negative interest rates should they be introduced.
The decision sent sterling spiking back past the $1.36 mark after slipping this morning, as traders welcomed the call to keep rates positive.
Sterling rose half a cent against the dollar, while British government bond yields jumped by around 3 basis points on the back of the decision.
In a statement, the central bank said that it was expecting a rapid recovery in GDP towards pre-pandemic levels in 2021, led by the UK’s vaccination programme.
However, it cautioned that the outlook for the year remains “unusually uncertain”.
“It depends on the evolution of the pandemic, measures taken to protect public health, and how households, businesses and financial markets respond to these developments”, the nine-strong MPC added.
Negative interest rates would take six months to implement
It was widely expected that policymakers would keep interest rates on hold at today’s meeting, despite continued speculation that a negative interest rates could be introduced.
The Bank’s Governor Andrew Bailey has mentioned the possibility of negative rates throughout the last year, but seems to have cooled on them recently.
However, the MPC did reveal that it would take six months for the Bank to implement negative rates if it pursued the policy.
The finding came from a review of how prepared lenders like HSBC, Lloyds and Barclays would be to implement negative interest rates for the first time, which it published alongside its policy decision.
In a letter to bank chiefs, BoE deputy governor Sam Woods said:
“The PRA understands that the majority of firms would be able to implement tactical solutions to accommodate a negative Bank Rate within six months, without material risks to safety and soundness.
“An implementation period of shorter than six months would attract increased operational risks and could adversely impact some firms’ safety and soundness”, it added.
Woods also said that the feedback showed a zero rate would be easier to put in place than a negative rate.
Other central banks, such as the European Central Bank, have taken the negative rates step, but the BoE is yet to follow suit.
Analysts suggested that the unanimous nature of today’s decision suggested that negative rates were “off the table” for the time being at least.
Luke Bartholomew, senior economist at Aberdeen Standard Investments, said: “What is perhaps more interesting is that the decision was unanimous, with no participants voting for a cut to negative interest rates despite several expressing their attraction to the policy.
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“This is unlikely to be the end of that debate, with the Bank releasing feedback from various stakeholders today along with their previous analysis.”
But Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said that the review was not a signal that negative interest rates would follow later in the year.
“Such a signal only ever is found in its economic forecasts; they show that significant extra stimulus would be unhelpful”, he said.
Old Lady also keeps bond-buying programme at £895bn
Economists also predicted no changes to the Old Lady’s bond-buying programme, which was upped by £150bn in November.
Quantitative easing sees the Bank inject money into the economy to boost lending.
The Bank added that the new lockdown restrictions had overturned the predictions it made at November’s meeting.
It said that GDP had risen to around 8.0 per cent below 2019’s levels in the fourth quarter of 2020, “materially stronger” than anticipated.
But on the other hand, current restrictions will see GDP fall 4.0 per cent in the first quarter of 2021, in contrast to expectations of a rise in the November report.
HSBC’s chief investment officer Willem Sels said that it was natural that the Bank had held off fiddling with its policy given the uncertainty.
“On the one hand, COVID-19 and subsequent lockdowns have led to a deterioration in current activity, but on the other, the future outlook has improved as a result of the faster-than-expected vaccination programme.
“Bond investors will be comforted by the strong consensus among governors to keep monetary policy very accommodative”, Sels added.
“The BoE also kept the door open for negative interest rates, if they are needed at some stage. This should support gilts, anchor the yield curve and keep financial conditions from tightening, hence supporting investment grade credit.”