Macroeconomics: UK economy, IB Economics

The Resolution Foundation has offered a couple of interesting suggesting regarding the conduct of monetary policy, arguing that the inflationary target might be increased to 3%, and also giving it the power to set negative interest rates in future downturns, in the hope of giving it greater power to stimulate aggregate demand in extreme circumstances. 

A little primer: what are negative interest rates and how might they affect the UK economy? Well, here you are...

For all the talk about the possibility of negative interest rates, it seems that the practicality of the move is more complex, making it likely that some lenders might actually increase mortgage rates because their computer systems aren't set up to cope with the possibility of negative rates. 

Larry Elliott looks at the prospects for policymaking in the next few months, noting that for all the talk of negative interest rates, we need to be realistic about the capacity of the Bank of England to stimulate the economy.

As a result, he suggests that in the immediate term, despite an expansion of QE, the real stimulus is going to be fiscal, and that the concerns of the recent past about the level of government spending, and government debt, should be dismissed.

Bellicose rhetoric from the Governor of the Bank of England, suggesting that an aggressive approach is better than excessive caution in times of uncertainty.

Given the context in which he's saying this, perhaps this hints at the possibility of the Bank adopting negative interest rates at some future date. 

A little footnote to the discussion about the possibility of the UK adopting negative interest rates, the Chairman of Nat West, Howard Davies, has suggested that the financial system isn't yet ready for this.

The Bank of England is clearly trying to distance itself from last week's Silvana Tenrenyo's comment about negative interest rates. The Governor has already suggested that they are not being considered at the moment and this has been re-emphasised by the Deputy Governor. 

Adam Tooze looks at a recent history of monetary policy, within the context of the possibility of deflation in the wake of Covid-19, arguing that central banks are considering policy alternatives that were inconceivable only a few years ago, such as negative interest rates. 

It's an interesting look at how the intellectual currents have changed, and how we've adapted to a world of monetary stimulus. There is, thankfully, no mention of Modern Monetary Theory (MMT) which for all the hype has never seemed that 'modern' to me.

The latest inflation data must be a slight concern to the Chancellor, given that it records a fall in inflation to 0.5%, driven mainly by record falls in fuel prices. Indeed, food prices were one of the few categories of goods to see price rises.

The next MPC meeting will be interesting: it takes place tomorrow and the Bank is expected to approve more stimulus measures, with an expansion of the existing programme of QE. But will we see either negative interest rates or so-called 'helicopter money'?

But as Larry Elliott points out, negative interest rates aren't here yet....

The latest Bank of England data suggests that after a 4.2% decrease in economic activity in the first quarter of the year, the UK is going to see a strong recovery in Spring and the economy pick up.

Of course, the key to this is the success of the vaccination programme, and if this allows confidence to return to the economy, then spending is going to pick up too. 

That said, the Bank has also given High Street banks notice that interest rates could go negative, if not immediately. 

We live, as I've said on many occasions, in interesting times. 

Such is the scrutiny of the Bank of England that Silvana Tenreyro's speech to students at the University of the West of England has caused quite a stir, in that she made a case for the Bank adopting negative interest rates. 

This is not to say that it's going to happen, but it's certainly one of the policy alternatives on the table. And it also tells you something about the extent to which the machinations of the Monetary Policy Committee are subject to external scrutiny. 

I've already 'scooped' this sort of thing before - watch this space, it seems that the Bank of England are weighing up the introduction of negative interest rates. 

We'll see - but don't expect it to reach commercial markets. 

The Observer business leader starts by looking at the prospect of negative interest rates: given the fact that the post-lockdown recovery has stalled, this article calls for the Bank of England to be brave and take the plunge. 

The latest noises from the Bank of England rather imply that the possibility of the Bank adopting negative interest rates has moved a little closer, with news that it has surveyed commercial banks asking about their attitude to, and ability to cope with negative interest rates. 

Current rates are 0.1% - and thus any further cuts are going to take us into negative territory.  It would represent a marked change in the Bank's position on this aspect of monetary policy.

Are we on the brink of negative interest rates? Certainly one of the external members of the MPC, Silvana Tenrenyo, suggested that the empirical evidence from other countries suggested that such a move might help firms with their borrowing costs.

However, earlier last week, Governor Andrew Bailey seemed to suggest that while the Bank had looked at the practicalities of this, there was little immediate prospect of it happening.

Just the first of these business briefs is worth thinking about: what are negative interest rates, and why is the Bank of England actually contemplating them? A short answer would be to simply suggest: a liquidity trap. And given the state of public finances, it is difficult to see where a sizeable fiscal stimulus is going to come from too.

In short, might we soon be paying banks for holding our money in them? 

The Deputy Governor of the Bank of England has suggested that the Bank is looking at further monetary stimulus in a speech given yesterday. This implies that there might be an expansion of Quantitative Easing (QE) to £745bn but that whilst negative interest rates have been proposed in some quarters, there's still a sense that he's reluctant to use negative interest rates as a potential solution.