Pound strengthens on BoE’s negative interest rate comments

12 Jan 2021

The British pound jumped following the governor of the Bank of England appearing to question if the central bank would try negative interest rates as a stimulus tool for the pandemic-scarred UK economy. 

In a speech to the Scottish Chambers of Commerce on Tuesday, Andrew Bailey said: “In simple economics and maths terms, there is nothing to stop [negative rates] at all.  There’s no asymmetry in that sense." 

However, he added that “there are a lot of issues" with negative rates, which the European Central Bank introduced in 2014 to encourage borrowing and spending. 

The pound was 0.6% up against the dollar at $1.359. Against the euro, the UK’s currency added almost 0.7% to buy €1.119. 

The central bank has been sending mixed messages on the issue of negative rates in recent weeks.  Silvana Tenreyro, one of the nine members of Threadneedle Street’s monetary policy committee, noted on Monday: “My overall assessment is that, while we can never have complete certainty, negative interest rates should with high likelihood boost UK growth and inflation. Cutting bank rate to its record low of 0.1% has helped loosen lending conditions relative to the counterfactual (of no policy change), and I believe further cuts would continue to provide stimulus.”

She added: ““All else equal, looser monetary policy can help the economy recover faster, bringing inflation back to target, while also preventing some of the job losses and business failures that could otherwise reduce potential output in future.

“It is possible that more stimulus be needed to do so at an appropriate pace. If that is the case, having negative rates in our toolbox will, in my view, be important.”