Here’s an honest question: do you think anyone at the Bank of England actually knows how to move interest rates? I’m talking about a cut in the bank rate from .50 basis points – or even a rise! According to The Wall Street Journal, no current member of the Monetary Policy Committee – including BoE governor Mark Carney – has been part of a rate move. Let’s hope they have the instruction manual!
If they do find the manual, they still have to pull the right lever. Which one will it be? The bank has some choices. Interest rates are already at 322-year lows. They could go lower still. But it’s hard to imagine anyone thinking that a marginal change in interest rates will get the economy firing on all cylinders at this point. There are too many other tensions beneath the economic surface for that.
What else can the bank do? It can expand its little known “Funding for Lending” programme. This programme was set up in 2012 to get banks and building societies to lend money to “the real economy.” Remember what I’ve shown you all week. The bank wants you to spend money like nothing matters! So far, it’s pursued this policy by giving banks more and cheaper money.
But “the real economy” hasn’t reacted in the desired way. Savers aren’t spending. “Savers appear to be hoarding cash at the fastest pace since the financial crisis over fears that the Bank of England may cut interest rates into negative territory to cushion the economic blow from Brexit,” writes Phillip Aldrick in today’s The Times.
He continues:
Statistics from the Bank show households and businesses have increased their holdings of banknotes and coins at a rate of more than eight per cent a year and there was a rapid acceleration after Britain voted to leave the EU… Savers appear to have been taking matters into their own hands by withdrawing their money to avoid negative interest rates. Two members of the Bank’s rate-setting committee have floated the idea and last month NatWest wrote to its business customers warning that it may have to charge them to accept deposits. Central banks in Japan, Denmark, Sweden and Switzerland have introduced negative rates.
We know by now that negative rates actually accelerate cash hoarding. People rush to get their money out of the bank before it shrinks. But that doesn’t mean the BoE won’t try it anyway. All the cool central banks are doing it.
More seriously, the bank’s inflation and growth guide will give some useful guidance. If the forecasts for both are weak – and all the post-Brexit noises out of the bank are anxious and worried – then negative rates in the UK begin to look more likely, even if it’s not today.
One final note. Other than the correction in the pound there have be no obvious and visible Brexit shocks to the economy. The kerfuffle with property funds was more about investors in illiquid securities panicking. So why is the bank and so much of the establishment worried that Brexit will be a bigger shock down the road?
It’s because nobody knows still what Brexit looks like. What trade arrangements the UK will have with the EU and the rest of the world. What the effect on the City will be. On immigration, wages, and government spending. All unknown.
Regardless of how you think things will turn out – and I believe they’ll be fine eventually – the uncertainty is what weighs. Uncertainty is a normal condition in life. But it makes some people incredibly nervous. And when those people have money to invest, it may cause them to wait until the picture becomes more focused.
Category: Central Banks