Bank of England’s Broadbent Expresses Support for Further Rate Cuts, According to Reuters

By David Milliken

LONDON – Bank of England Deputy Governor Ben Broadbent expressed his support for another interest rate cut this year but dismissed the idea of using a new bank funding scheme to covertly implement negative interest rates.

Broadbent emphasized the importance of monitoring the labor market to assess the impact of the UK’s decision to leave the European Union, noting a recent survey that indicated the largest decline in permanent hiring since 2009.

The Bank of England recently introduced its most substantial stimulus package since the financial crisis, reducing the primary interest rate to a record low of 0.25 percent, resuming quantitative easing, and launching new initiatives to purchase corporate debt and provide affordable credit to lenders.

The central bank revealed that most members of its nine-member Monetary Policy Committee anticipate further rate cuts approaching zero later in 2016, and Broadbent confirmed he was among them.

“There was a majority that expected to vote to cut interest rates again if the economy developed as forecasted, and yes, I was one,” Broadbent stated in an interview at the Bank of England with two other media organizations.

When questioned whether the Bank’s more aggressive action than many economists expected was influenced by private information regarding the aftermath of Brexit, Broadbent firmly responded, “No, no, no.”

Joining the MPC in 2011 after his tenure as an economist at Goldman Sachs, Broadbent insisted that the Bank still has numerous avenues to stimulate economic growth. Alongside an interest rate cut, he mentioned the possibility of increasing the target for government bond holdings before completing the £60 billion in purchases announced recently, slated to take six months.

The Bank has also initiated large-scale corporate bond purchases, and while Broadbent did not exclude the possibility of buying exchange-traded funds that contain company shares in the future, he clarified that this has not been a topic of discussion yet.

“I believe it poses a material risk, but it’s not qualitatively different from what we’ve done before. You would need to think it through thoroughly, but … I cannot provide direction on it,” he remarked, humorously mentioning his fatigue after the previous day’s announcements.

The Bank of Japan has acquired substantial shares through ETFs to stimulate its economy, while the Bank of England has been cautious about similar actions due to the associated risks compared to purchasing investment-grade corporate debt.

Broadbent noted that neither monetary policy nor additional stimulus from tax cuts or increased government spending could entirely counteract the economic impact of leaving the EU. “There are limits to what monetary policy, and indeed any demand-management strategy, can accomplish – even traditional fiscal policy – in addressing what is fundamentally a structural impact on the economy.”

Finance minister Philip Hammond stated that both the government and the Bank possess the necessary tools and that he would reassess the government’s policy approach in a mid-year budget update later this year.

Commenting on potential rate cuts, economist Philip Shaw indicated that Broadbent’s remarks hinted at preparations for a reduction to 0.1 percent in November, though it remains uncertain how the Bank would respond if the UK were to enter a recession. Shaw anticipated increased government bond purchases, greater corporate bond buying, and potentially an extension of the Term Funding Scheme.

The TFS, another key element of the Bank’s recent actions, provides lenders with up to £100 billion of newly created central bank funds at the updated rate of 0.25 percent. The objective is to ensure that banks fully pass on the rate cut to borrowers; however, Broadbent emphasized the need for overall compliance rather than monitoring every individual mortgage.

Bank of England Governor Mark Carney remarked that banks have “no excuse” for not passing on the rate reduction. While most major banks have complied, Lloyds Banking Group has yet to do so.

Broadbent clarified that, unlike the Funding for Lending Scheme of 2012, the TFS is not intended to stimulate lending. “It’s not so much the availability of credit that limits the economy,” he stated. “In reality, we did not anticipate significant loan growth, nor did we expect this even if we offered more incentives for it.”

He mentioned that the scheme would need to be adjusted if the central bank were to reduce rates near zero.

However, Broadbent reaffirmed that the Bank would not use the TFS as a covert means to introduce negative interest rates—an approach that some analysts have speculated about considering Carney’s firm opposition to lowering the main Bank Rate below zero.

“There are limitations on our end as well. We wouldn’t want to offer financing at substantially negative interest rates because it would result in losses for us,” he clarified.

Broadbent also referenced the experience of the European Central Bank with a similar initiative, noting that even central bank assistance to banks could not prevent a detrimental impact on lending when rates fell below zero.