Bank of England (BoE) policymaker Michael Saunders reveals the Bank may cut interest rates slightly below zero and should be ready to pump more stimulus into the economy quickly if needed to recover from the coronavirus pandemic. In a speech last week, he said, “In my view, there may be some modest scope to cut bank rate further but, if we do, it may be preferable to move in relatively small steps.”
The BoE is reviewing the feasibility of taking its benchmark rate negative from its current level of 0.1 per cent. Saunders said, “My judgment at present is the ELB (effective lower bound) for the UK is probably a little below zero, provided appropriate mitigations are in place.” He said the Bank would comment on the review “reasonably soon.”
The BoE's nine rate-setters have expressed differing views over the suitability for Britain of negative rates. British economy shrank by a quarter earlier this year as the country went into a first coronavirus lockdown. Saunders said he thought the BoE should not worry about overdoing future stimulus and it still had “quite a lot of scope” to expand its 895 billion-pound bond-buying programme.
He said, “Provided inflation expectations are well contained, it is better to err on the side of providing too much monetary stimulus rather than too little, in order to underpin prospects for a strong recovery in the economy.” Recent updates about the development of Covid-19 vaccines has reduced several risks facing the economy.
Saunders said, “But we are not out of the woods yet, and there are some headwinds that could leave the economy stuck with persistently high unemployment and below-target inflation.”
