BOE's Silvana Tenreyro talks up benefits of negative interest rates

Saleha Riaz
·4 min read
“There is no clear evidence that negative rates have reduced bank profits overall, and a number of studies find positive impacts, once you take into account the boost to the economy,” said Silvana Tenreyro, external member of The Bank of England’s Monetary Policy Committee. Photo: Bank of England
“There is no clear evidence that negative rates have reduced bank profits overall, and a number of studies find positive impacts, once you take into account the boost to the economy,” said Silvana Tenreyro, external member of The Bank of England’s Monetary Policy Committee. Photo: Bank of England

Negative interest rates won't damage the UK banking system and are effective in stimulating growth, Silvana Tenreyro, external member of The Bank of England’s (BOE) Monetary Policy Committee (MPC) said in a speech today.

She also talked up the potential effectiveness of negative rates as a policy tool. However, economists maintain that the BOE will not take rates negative.

“Tenreyro already has revealed her cards, highlighting on several occasions last year that negative rates have had a positive impact in other countries where they have been imposed,” Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said in a note ahead of the speech.

As Tombs had pointed out, Tenreyro said today “the financial-market channels of monetary policy transmission have worked effectively under negative rates in other countries, with some of the evidence pointing to more powerful effects.”

She said that through standard cost of capital and exchange-rate mechanisms, as well as higher asset prices, these effects should lead to higher consumption and investment, and boost net exports and inflation.

She also noted that the evidence from experiences of negative rates in other countries suggests that “banklending channels” of monetary policy transmission have also been effective at boosting lending and activity, though there is some variation in the size of the estimated effects.

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“There is no clear evidence that negative rates have reduced bank profits overall, and a number of studies find positive impacts, once you take into account the boost to the economy,” she said.

Tenreyro said “it is possible that the current structure of the UK banking system could lead to a less positive impact on bank profitability,” adding “at worst, in my view, this could only make bank-lending channels slightly less powerful than otherwise, while I expect the financial-market channels to work normally.”

The aforementioned Pantheon Macroeconomics note said investors see little chance of immediate action from the MPC, but it is pricing in a 10bp decline in bank rate, from its current 0.10% level, by the Committee’s meeting on August 5.

The report said the probability of easing is unchanged since early December, even though a no-deal Brexit has been averted, due to the major deterioration in the UK’s COVID-19 situation.

“We agree with the consensus view that the MPC will hold fire in Q1,” it said, explaining that “financial conditions are extremely loose; UK equity prices have had a stronger start to the year than those overseas, while gilt yields have remained at rock-bottom levels.”

Meanwhile, a report by ING Economics also said the BOE is likely to steer away from negative rates.

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“While the short-term outlook is incredibly bleak, the prospects for the recovery have improved since the Bank of England's last meeting in November. We therefore think the Bank will opt against a move to negative rates in February,” the study said.

The report added that at its February meeting, the BOE is expected to unveil the findings of its survey of commercial banks which sought views on how sub-zero rates would impact them.

“We’ve long felt the impact on bank profitability is unlikely to be the factor that steers the MPC away from using negative rates. But there is clearly still an active debate on whether the policy would carry many benefits. While some external MPC members, including Silvana Tenreyro, have indicated their support, other members - notably Chief Economist Andy Haldane - have thus far been less enthusiastic,” ING said.

Back in September, speculation had been mounting that the Bank of England could take interest rates into negative territory for the first time in history next year if the UK economy weakens further.

BoE governor Andrew Bailey had refused to rule out taking UK interest rates into negative territory back then.

Watch: Will interest rates stay low forever?