Negative interest rates remain a distant and unlikely prospect
The BoE effectively gave the financial sector six months to prepare for the
possible use of negative rates, but that should be long enough for the UK
economy to move into vaccine-fuelled recovery and remove the need for
such an emergency move, which would also risk unintended
consequences, according to Ian Williams, economics & strategy research analyst at Peel Hunt.
“The main takeaway from the MPC’s February deliberations should be that negative interest rates in the UK remains a distant, and extremely unlikely, prospect,” Williams said this morning.
The 9-0 vote to keep policy unchanged this month confirms that even the external members, who have voiced support for negative rates, do not feel they are appropriate now, despite the impact of the latest lockdown on economic activity, he added.
“The overall message should sustain the recent upward trend in sterling and in long-dated gilt yields,” Williams noted.
None of that was especially helpful yesterday for UK equity indices, which ended the day flat. The FTSE 100 faced some stock-specific drags from Unilever, down by 6 per cent.
Apart from the unanimous vote to maintain bank rates at
0.1 per cent and the size of the asset purchase programme at £895bn there is no intention to tighten policy until “clear evidence that significant progress was being made in eliminating spare capacity”, Williams said.
Economic recovery
GDP was “materially stronger” than expected in Q4 2020, he continued, but due to the current Covid-19 restrictions, the economy will see a contraction of around -4 per cent in the first quarter.
“Subsequently, the vaccination programme is expected to see growth ‘recover rapidly’, supported by the fiscal and monetary policy measures already in place,” Williams said.
CPI should rise quite sharply towards the +2 per cent y target in the spring as VAT cut ends and energy price comparatives shift and, as usual, is projected close to the target rate at further end of the forecast period, he added.
The MPC assumes that post-Brexit trade arrangements reduce overall GDP by around -1 per cent. Short-term risks to central projections are tilted to the downside, but less so than in November.
“There is potential for a rapid change in household behaviour and consumption once restrictions are eased,” Williams concluded.