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UPDATE 2-Bank of England's Ramsden sees floor for rates above zero

Mon, 28th Sep 2020 11:10

* Ramsden says he thinks 0.1% is floor for rates

* BoE looking at possibility of negative rates

* "We are not about to use them imminently" - Ramsden

* Sterling extends rise on his comments
(Adds details and background)

By William Schomberg and David Milliken

LONDON, Sept 28 (Reuters) - Bank of England Deputy Governor
Dave Ramsden said he thought the floor for the central bank's
key interest rate was 0.1% but the BoE was "duty-bound" to
consider going below zero as part of its efforts to help the
economy through its coronavirus crisis.

"For me, I see the effective lower bound still at 0.1 which
is where Bank Rate is at present," Ramsden said in an interview
with Britain's Society of Professional Economists posted online.

Sterling extended its rise against the dollar and the euro
after his comments.

The BoE said this month it would look at how it might be
able to implement negative rates if they were needed, building
on an announcement in August that the option was part of its
toolbox.

One of the BoE's nine interest-rate setters, Silvana
Tenreyro, said in a newspaper interview published on Saturday
that the investigation into whether negative rates might help
the economy had found "encouraging" evidence.

Ramsden said in his interview with the SPE that there were
some jurisdictions where negative rates appeared more effective
than in the euro zone and Japan, but their usefulness depended
on the economic cycle and the structure of the banking system.

The BoE cut interest rates to a record-low 0.1% in March,
and until this year it had always ruled out negative rates,
saying they would hurt Britain's banks and building society
lenders.

But the scale of the COVID-19 hit to the economy, and the
possibility of Britain failing to strike a trade deal with the
European Union, have forced the BoE to reconsider.

Ramsden said interest rates on households' bank deposits
tended not to fall below zero when central banks pushed their
benchmark rates into negative territory - which could hurt banks
as the gap between lending and funding rates would narrow.

Britain's banks were also likely to be hit by higher loan
losses soon as borrowers struggle to cope with the coronavirus
hit, he added.

That represented a different phase of the economic cycle to
when the European Central Bank introduced negative rates, which
took place during a recovery phase.

Ramsden said the BoE was not going to use negative rates
soon and engagement with banks on the possible change would take
time, echoing comments from his colleagues.

"We are not about to use them imminently. It will take time
to do this work," he said.

Ramsden also said he was focused on the risk that
unemployment could rise further than the central case in the
BoE's most recent forecasts.

"For me, when we're looking at unemployment, it is more
likely that unemployment will end up peaking higher than 7.5%
than lower, and it will end up coming down more gradually," he
said.

Official figures show unemployment of 4.1% for the three
months to June.
(Reporting by William Schomberg and David Milliken; Editing by
Alison Williams)

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