Economists are forecasting that the Bank of England could launch yet another stimulus package worth around £100billion before cutting interest rates to below zero.
Although economists say interest rates are likely to stay at 0.1pc when the Bank meets this week, data firm Bloomberg has said the money markets anticipate a move to negative rates in the second quarter of next year. One expert has even suggested the Bank may introduce restrictions on the use of cash at some point.
The move to negative rates would be the first time it has taken place in Britain and would involve commercial banks being charged to keep their money in the Bank, with the charges, passed on to their customers. The aim of this move would be to encourage banks to lend and firms and consumers to spend rather than save, thereby giving the economy a stimulus.
After warning of the possibility of negative rates in June, Bank Governor Andrew Bailey is expected to publish a report this week detailing how the scheme would work and the consquences for the economy, businesses and consumers.
Economy could need negative rates and QE
The Bank has strengthened its programme of ‘quantitative easing’ (QE), or money creation, increasing the total from £445bn to £745bn since the outbreak of the pandemic.
Howard Archer, chief economic adviser to the Independent Treasury Economic Model (ITEM) Club which uses the Treasury’s computer model of the economy, said he expected even more QE later in the year to act as a stimulus.
Douglas McWilliams, deputy chairman of the independent Centre for Economics and Business Research (CEBR), said that rising levels of job losses and business failures could well necessitate a mix of QE and negative rates just to keep the economy afloat.
Possible restrictions on the use of cash
However, he warned that in the absence of controls on the use of coins and notes, negative rates would simply result in cash being hoarded. He added that he would be interested to see whether the Bank suggests restrictions on cash usage this week and, if so, the methods that would be used to achieve this.
Limitations could include a ban on the use of cash, considered to be unlikely, limiting ATM withdrawals and requiring all self-employed people to register for VAT. Other measures could comprise a reduction in the quantity of higher denomination banknotes in circulation and encouraging larger retail chains to accept cash as payment only for items of small value.
Chris Williamson, chief business economist at IHS Markit, doesn’t think negative interest rates are imminent, but he thinks the Bank will have to create more stimulus somehow, and will have to face the fact that the recovery earlier in the year is losing momentum.
Recovery led by manufacturers
The latest figures from the Confederation of British Industry (CBI) indicate that the UK’s economy has entered a ‘recovery phase’, with manufacturers leading the way. The report, compiled from a survey of 752 businesses, concluded that the decline in activity is expected to continue to ease over the next three months.
As the only sector expecting a return to growth, manufacturers are the most optimistic. Next are the retailers, who expect sales to become stable, while service sector firms expect the rate of decline to continue to ease.
The findings will support hopes of a so-called V-shaped recovery. The survey found a large increase in companies saying they were ‘completely operational’, with staff working either on company premises or partly remotely such as from home. The percentage increased from 50pc in June to 67pc in July.
Respondents said one-metre social distancing had enabled them to operate at 85pc capacity, compared to 72pc under the Government’s two-metre rule.