BoE's Tenreyro says evidence on negative rates is 'encouraging'

LONDON (Reuters) - The Bank of England’s investigation into whether negative rates might help the British economy through its current downturn has found “encouraging” evidence, policymaker Silvana Tenreyro said in an interview published late on Saturday.

Flowers grow in front of the Bank of England, following the outbreak of the coronavirus disease (COVID-19), in the financial district of London, Britain July 17, 2020. REUTERS/Hannah McKay

Tenreyro told the Sunday Telegraph that she did not expect Britain to continue to enjoy a fast V-shaped recovery, due to headwinds from local flare-ups in COVID-19, rising unemployment and a “very weak” global economic outlook.

Britain’s central bank said in August that it was taking a closer look at the case for cutting interest rates below zero, and in September it said it would take a detailed look at the idea’s technical feasibility during the fourth quarter.

However Governor Andrew Bailey said this did not mean the BoE was committed to going ahead with the idea, which would potentially see people charged for holding deposits with banks.

Tenreyro said evidence from the euro zone and Japan showed that cutting interest rates below zero had succeeded in reducing companies’ borrowing costs and did not make it unprofitable for banks to lend.

“The evidence has been encouraging,” she said, adding that cuts in interest rates below zero had been almost fully reflected in reductions in interest rates charged to borrowers.

“Banks adapted well – their profitability increased with negative rates largely because impairments and loss provisions have decreased with the boost to activity and the increase in asset prices,” she said.

So far, the BoE has responded to the coronavirus pandemic by cutting interest rates to a record-low of 0.1% and expanding its asset purchase programme by 300 billion pounds ($382 billion).

Tenreyro said she expected Britain’s rebound from the historic 20% slump in output during the lockdown in the second quarter looked set to lose pace as COVID-19 cases rose again.

“Flare-ups like we’re seeing may potentially lead to more localised lockdowns and will keep interrupting that V(-shaped recovery).”

She added that it was too early to judge if scaled-back job support plans announced by finance minister Rishi Sunak on Thursday would have a big impact in staving off a rise in unemployment, especially in hard-hit sectors such as high-street retail and hospitality.

“Another factor interrupting the V is a very weak global outlook, with high uncertainties, particularly with a second wave already striking many countries,” she said.

Reporting by Kate Holton and David Milliken; editing by Grant McCool and Sandra Maler