17th September, 2020
To negative, and beyond
After the Bank of England’s latest policy meeting, UK money markets are pricing in negative interest rates as early as Feb. 2021. Members on the Bank’s rate setting committee were briefed on how they could implement plans to explore how a negative interest rate could be implemented, which markets read as bringing the UK a step closer to sub-zero territory. If it does cut rates below zero, the BoE would join a growing club of central banks with negative policy rates, a group also confronting side effects of reduced profitability of banks and more recently, a rise in household savings rates (a trend that also preceded this year’s pandemic shock). A paper published last month in the Journal of Behavioral and Experimental Economics, found the highest positive impact on risk-taking and borrowing behaviour was achieved when rates fell from 1% to 0%. All of this could give policymakers pause, even if they do decide to take the plunge.
Chart and commentary by Ritvik Carvalho
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