After finalizing a series of meetings, the Monetary Policy Committee of the Bank of England (MPC) approved this Thursday, September 17, to maintain interest rates at 0.1% and will study the possibility of setting negative interest rates in the face of a crisis caused by growing unemployment.
The central bank had already studied last August the effectiveness of a possible adoption of negative rates, in light of the progressive decrease in rates in recent years, it says The document published this Thursday.
Consequently, the MPC was briefed on the Bank of England’s plans to explore how a negative Bank Rate can be effectively implemented, if the inflation outlook warrants it at some point in this low rate period. The Bank of England and the Prudential Regulation Authority will begin operational considerations in the fourth quarter of 2020.
Monetary Policy Committee, Bank of England.
Theoretically, negative interest rates would discourage saving since individuals and organizations would not receive interest on the cash they keep deposited in banks. Instead, they would have to pay the banks to save. The prospect of receiving money for borrowing would also be opened.
These apparent paradoxes do not materialize in practice, since the current loans maintain the agreed interest rates at the time they are granted. But negative rates would benefit those who have variable rate loans. Only English banks have a forecast: the fine print in mortgage loan contracts states that rates cannot be less than zero. For this reason the rate applied to existing variable rate loans, if a negative rate is adopted, will effectively be zero.
Anyway, the idea of negative interest rates is to incentivize companies to borrow, invest and grow, which would provide a boost to the economy hit by the current recession. This is described by The Telegraph newspaper as “one of the worst in history.”
In addition to keeping interest rates at 0.1% and putting the unusual option of negative interest rates on the table, the Bank of England will continue with its government bond and corporate bond purchase program. Total purchases remain unchanged at GBP 745 billion, approximately USD 942 billion.
The financing for these acquisitions, the document points out, comes from “the issuance of central bank reserves.” which is equivalent to inorganic money printing. If market conditions deteriorate again, the issuing entity indicates that it would be “ready to increase the pace of purchases, to ensure the effective transmission of monetary policy.”
There are similarities in this Bank of England arrangement, both with monetary policy of the United States Federal Reserve (the Fed) as with the latest actions of the European Central Bank, in the sense of facing the crisis with an unusual increase in public debt. In the case of the United States, this fiscal year, which ends on September 30, is expected to exceed its gross domestic product.
The Covid 19 global health crisis affected the economy on a global scale. On March 12 all the markets fell including bitcoin and cryptocurrencies. In the case of bitcoin, despite recent price fluctuations the pioneer cryptocurrency still maintains a 52% return since the beginning of 2020, and a 128% recovery compared to the drop in mid-March. At the time of this writing, bitcoin is trading at a price of $ 10,907, according to figures from Messari.