Britain’s Silly Flirtation With Negative Interest Rates
(Bloomberg Opinion) -- Andrew Bailey, the Bank of England’s new governor, tried out a little bit of “whatever it takes” central banker language last week by opening up the possibility of negative interest rates in the U.K. “I don’t want to say we’re nearer” to that eventuality, he said “but we’re not ruling anything out.”
For now the BOE’s focus is still on buying more bonds through its quantitative easing programs to manage the Covid-19 economic crisis, and rightly so. Negative rates would open up a dangerous pathway for Britain. They should only be used if nothing else manages to stimulate the economy. The official bank rate has been lowered twice this year already to its current 0.1%.
With Prime Minister Boris Johnson’s post-lockdown plan only just published, we need to see whether it gives an adequate boost to consumer spending, which constitutes about one-third of the U.K.’s gross domestic product and is the driver of the country’s economy. There’s certainly a lot of room for improvement. Barclays Plc reported that credit card spending fell 53% in the last week of March versus the prior year comparison. And, during normal times at least, Brits don’t need much encouragement to start spending: The U.K. household savings rate is about 6%, significantly lower than the 10.5% European average.
One possible advantage of a gradual and staggered reopening would be if people took their summer holidays in the U.K., providing a desperately needed leg-up to the domestic hospitality and leisure industries. Cutting deposit rates to zero or below wouldn’t make those who can afford to spend feel any more emboldened.
The experience of negative rates thus far in Europe doesn’t really show that they stop citizens from saving and get them to spend more (the euro area’s household savings rate has remained elevated in recent years). They could indeed do the opposite by making savers worry about their dwindling nest eggs, leading in turn to increased hoarding. From a pure markets perspective, there’s also the peril of investors getting into riskier products to try to find yields.
The European Central Bank, which has had negative rates for several years, hasn’t cut official rates during this crisis after realizing that such a move wouldn’t do much. Much of the euro area appeared to be heading into recession before the coronavirus struck and lending has been anemic at best. Sweden has reversed its negative rates back to zero.
Bailey will also be mindful of not crippling those lenders who have offered their customers variable-rate mortgages — particularly less well-capitalized building societies. More than a quarter of Britain’s 1.5 trillion pounds ($1.85 billion) of home mortgages are subject to variable rates. If the BOE’s rate went sub-zero, that wouldn’t be healthy for the profit margins of lending institutions, which have been struggling for a while in a world of rock-bottom interest rates. Moody’s Investors Service downgraded the debt of the country’s largest savings deposit taker, Nationwide Building Society, at the end of April and it maintains a negative outlook on the U.K. banking system.
And it’s not as though the extra savings for those mortgage customers would really change the situation. Some 73% of U.K. residential mortgages are on fixed rates anyway. Those wealthy enough to have mortgages (you have to be rich to be able to afford to borrow) often end up saving the proceeds from lower interest rates rather than spending.
One reason for pushing official rates below zero is to shame lenders into passing the cuts onto their customers. But that won’t force banks to lend more, particularly as they’re having to offer mortgage payment holidays because of the Covid-19 lockdowns. The BOE is already encouraging bank lending via super-cheap loans to the industry.
There are better regulatory methods for kick-starting the transmission of monetary policy, such as telling banks that they won’t be able to restart dividend payments or generous bonuses unless they start pumping money into the economy via lending. Bailey and his institution need to try to make sure banks are in a position to lend and have the right incentives. Maybe that’s an impossible task given the natural fears about bad loans. Negative rates aren’t any kind of solution.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
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