Negative rates part of BOE’s policy toolbox, says governor Bailey

Bloomberg

The Bank of England (BOE) has plenty of room to add more monetary stimulus to fight UK’s economic slump, including negative interest rates if needed, Governor Andrew Bailey said.
“We are not out of firepower by any means,” he said at the Federal Reserve’s annual policy symposium, being held virtually instead of the traditional venue at Jackson Hole, Wyoming. “To be honest it looks from today’s vantage point that we were too cautious about our remaining firepower pre-Covid.”
Since the pandemic struck, the BOE has unleashed a raft of stimulus measures, including slashing the benchmark rate to a record-low 0.1% and raising its asset purchase target to $985 billion.
Economists largely expect bond purchases to be raised again before the end of the year, and investors are betting that interest rates will be lowered to zero by September 2021.
Bailey also reiterated his view though that central banks will need to ensure that they have the headroom to take action in the coming decade. That confirms a major shift in the BOE’s strategy for removing emergency stimulus that he made earlier this year, when he stressed the need to reduce the institution’s balance sheet before hiking rates.
The appropriate policy mix “may be more nuanced than previously thought,” he said, noting that expanding the range of assets purchased is another way to create more headroom.
“Let’s not ignore the need to manage central bank balance sheets,” he said. “There are times when we need to go big and go fast.”
The speech was Bailey’s biggest international appearance since he started the job in March. Fed Chair Jerome Powell used the same forum to unveil a new approach to setting US monetary policy, letting inflation and employment run higher in a shift that will likely keep interest rates low for years to come.