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* BoE sees risks if negative rates used in under 6 months
* Sterling jumps as investors see less chance of sub-zero
rates
* A cut to zero would be less difficult - Woods
* BoE working on new guidance for easing stimulus
* UK economy seen shrinking by 4% in Q1
* 2021 growth forecast cut, 2022 estimate raised
By Andy Bruce, David Milliken and William Schomberg
LONDON, Feb 4 (Reuters) - The Bank of England gave British
lenders at least six months' breathing space on Thursday before
negative interest rates are a possibility, focusing instead on
the prospects for a post-lockdown rebound in a quarterly update
on the economy.
The pound gained a cent against the U.S. dollar and
10-year British government bond yields hit their
highest since March as investors interpreted the BoE's comments
as kicking negative rates into the long grass, at least for now.
The British central bank said it would ask lenders to get
ready for the possibility of sub-zero rates, but told investors
not to view them as a foregone conclusion.
"My message to the markets is you really should not try to
read the future behaviour of the MPC from these decisions and
these actions we're taking on the toolbox," Governor Andrew
Bailey told a news conference.
Most British businesses are hobbled by the third national
lockdown since the pandemic struck last year, when the economy
shrank by an estimated 10%. Many firms are also grappling with
post-Brexit barriers to trade with the European Union.
Britain's economy will probably contract again by 4% in the
first three months of 2021, the BoE said.
But, helped by Britain's fast vaccination programme, it was
expected to recover rapidly over the year and the BoE maintained
its forecast that the economy would regain its pre-pandemic size
by the first quarter of 2022 - earlier than most other
forecasters say.
The central bank lowered its forecast for British economic
growth for 2021 as a whole to 5% from its November forecast of
7.25%, but raised its forecast for 2022 to 7.25% from 6.25%.
"On negative rates, while the BoE judges these are a
practical option, they are unlikely to be needed by the time
preparations are complete," Martin Beck, an economist with
consultancy Oxford Economics, said.
As expected, the BoE maintained its Bank Rate at 0.1% and
left the size of its total asset purchase programme at 895
billion pounds ($1.22 trillion).
PENT-UP SAVINGS
Bailey said the economy might perform better than the BoE
expects with many richer households sitting on high levels of
pent-up savings after spending so much time stuck at home.
The BoE said it was working on developing a new message for
investors and businesses about when it might start to tighten
monetary policy, should it be needed.
The central bank said in 2018 it would not start to sell
down its stockpile of bonds until interest rates had hit about
1.5%. But since then, the BoE has doubled its holdings.
Bailey said there was a "range of views" about how to
respond to requests from banks for more time to get ready for
any move to negative rates. The four external, non-staff members
of the nine-strong Monetary Policy Committee have sounded more
open to cutting rates below zero.
The MPC has been divided about whether negative rates would
make it unprofitable for banks to lend and ultimately hurt
economic growth.
The European Central Bank, the Bank of Japan and other
central banks have implemented sub-zero rates.
In Switzerland, big banks initially did not pass negative
rates on to private and smaller corporate clients. But five
years on, nearly all Swiss banks have passed on some charges to
corporate and individual customers with large cash balances.
Sam Woods, a BoE deputy governor who heads the central
bank's regulatory arm but does not have a vote on rates, said
British banks could cope better with rates at zero.
Negative rates would pose the greatest challenge to lenders
which had issued mortgages that track Bank Rate, as it could
potentially lead to them having to pay interest to borrowers.
(Writing by William Schomberg; Additional reporting by Alistair
Smout, William James, Iain Withers, Kate Holton, Guy
Faulconbridge, Huw Jones, Estelle Shirbon; Editing by Toby
Chopra and Catherine Evans)
