LONDON (Reuters) – Bank of England policymaker Gertjan Vlieghe said on Tuesday the central bank could need to add more stimulus as risks to the economy had grown in response to rising COVID cases, and voiced some cautious support for negative interest rates.
The BoE has almost doubled its asset-purchase programme since the start of the pandemic, to 745 billion pounds ($966 billion), and economists polled by Reuters expect it to add 100 billion pounds more after its November meeting.
Vlieghe said he was concerned that risks of higher unemployment and weaker growth identified by the BoE in August were likely to materialise after the new wave of COVID cases, which has led to renewed curbs on businesses across Britain.
“In my view, the outlook for monetary policy is skewed towards adding further stimulus,” Vlieghe, an external member of the BoE’s Monetary Policy Committee, said in a speech published by the central bank.
Britain’s economy shrank by a record 20% in the second quarter of 2020, the biggest decline of any major advanced economy, and the initial rebound is losing momentum.
Vlieghe said a resurgence in retail spending to above pre-crisis levels partly reflected pent-up demand, which would fade. A shift in consumer spending patterns risked causing temporary unemployment, and could hurt investment, while it remained uncertain if the shifts would be permanent.
The BoE is also considering whether it is practical and effective to cut interest rates below zero, as the European Central Bank and Bank of Japan have done.
Vlieghe said the BoE had not reached a conclusion on this, but he did not have a fundamental objection and that it was important to look at new ways to support growth.
“My own view is that the risk that negative rates end up being counterproductive to the aims of monetary policy is low,” he said. “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.”
Tiered interest rates – where banks are only charged interest for part of the reserves they hold at the BoE – were one option to maximise the benefits and limit the costs of a negative interest rate policy, he added.
However, only a small minority of economists at banks polled by Reuters currently expect the BoE to implement negative interest rates next year.
While Silvana Tenreyro, another external MPC member, has also backed negative rates, Deputy Governor Dave Ramsden and Chief Economist Andrew Haldane have been less enthusiastic.
($1 = 0.7710 pounds)
(Reporting by David Milliken and Andy Bruce; editing by Michael Holden, Larry King)