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UPDATE 2-BoE's Ramsden sees no case for negative rates now

Wed, 21st Oct 2020 13:37

(Adds detail from Q&A)

By David Milliken and Andy Bruce

LONDON, Oct 21 (Reuters) - Cutting interest rates below zero
risks damaging British banks' capacity to lend, and is not
currently the right tool for the Bank of England to stimulate
the economy, Deputy Governor Dave Ramsden said on Wednesday.

"While there might be an appropriate time to use negative
rates, that time is not right now," Ramsden said at the annual
conference of Britain's Society of Professional Economists,
adding that asset purchases were a better way to boost demand.

Economists polled by Reuters expect the BoE to expand its
asset purchase programme by 100 billion pounds ($131 billion)
next month to 845 billion pounds, but do not expect it to cut
rates below zero this year or next.

In August, BoE Governor Andrew Bailey said the central bank
was looking more closely at negative interest rates - a tool
used by the European Central Bank and Bank of Japan - but said
no decision had been taken about whether it was viable.

While two external members of the BoE's Monetary Policy
Committee, Silvana Tenreyro and Gertjan Vlieghe, have spoken
positively about cutting rates below zero, Ramsden and BoE Chief
Economist Andy Haldane have both expressed doubts.

"There can be knock-on economic effects through the banking
system. These effects could reduce or even counteract the
stimulus from negative rates," Ramsden said.

Negative rates could reduce banks' incentive to lend, or not
be passed on to borrowers.

Ramsden said his views were not set in stone, and that
negative rates could be more attractive when there was less
pressure on banks' balance sheets.

But the structure of Britain's banking system was different
from the euro zone, so positive evidence there could not be
directly applied in the British context, he added.

Ramsden said he was also worried about growing signs of
higher unemployment, especially for younger people, and of
long-term damage to the economy from the coronavirus pandemic.

"There is a real risk of a more persistent period of higher
unemployment, and the recent strength in income growth might not
be sustained," he said.

"The negative impact on the supply side of the economy, or
degree of scarring, could potentially be greater than the 1.5%
we have assumed to date."
(Reporting by David Milliken and Andy Bruce; editing by Stephen
Addison)

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