BoE's Vlieghe says it appears as if the downside risks to the economic outlook have begun to materialise; in his view, outlook for monetary policy is skewed towards adding further stimulus

On negative rates: 

• On several occasions in the past decade, the MPC has discussed the effective lower bound, i.e. how low-interest rates can go before they become counterproductive to the aims of monetary policy. In 2016, the MPC concluded that the effective lower bound was “close to, but above 0%”.


• Growing empirical literature finds that the effect has generally been positive, i.e. negative rates have not been counterproductive to the aims of monetary policy


• Move to negative rates would require a number of conditions to be met: feasible, effective and appropriate - Feasible refers to the financial system being able to cope, operationally, with negative rates. Effective refers to the benefits of negative rates outweighing the costs by a sufficient margin, i.e. negative rates should not be counterproductive to the aims of monetary policy. Appropriate refers to the economy actually requiring  more monetary stimulus in order to meet the inflation target


• My own view is that the risk that negative rates end up being counterproductive to the aims of monetary policy is low. Since it has not been tried in the UK, there is uncertainty about this judgement, and the MPC is not at a point yet when it can reach a conclusion on this issue. But given how low short term and long term interest rates already are, headroom for monetary policy is limited, and we must consider ways to extend that headroom. 

On QE:

• QE is probably less potent now than in March; given that the effects of QE are state-dependent, and that a key channel through which QE  works is by affecting expected future real interest rates, which are already very low

Link to Release

20 Oct 2020 - 10:31- Fixed Income- Source: BoE