UK set to see more extreme monetary policy

published 4 June 2020

The UK is heading for negative interest rates, say Morgan Stanley analysts Jacob Nell and Bruna Skarica. Economic weakness is likely to prompt the Bank of England to slash rates below zero at the end of this year. While the top priority now is propping up the Treasury’s splurge through quantitative easing, the focus will shift to interest rates once government furlough schemes end in the autumn. It wouldn’t be a temporary measure either: the experience of other countries shows that negative interest rates can “persist for years”.

Talk of a world in which savers pay for someone else to take their money moves us into “Alice in Wonderland territory”, as Ruth Sunderland points out in the Daily Mail. In practice, negative interest rates are unlikely to mean interest income for mortgage borrowers and deductions on balances in savings accounts. But they make for a more brittle banking system and stoke wealth inequality by making it harder for the poor to grow their cash savings and adding yet more liquidity to asset markets.

“Ultra-extreme monetary policy” has wrought enough damage as it is, agrees Liam Halligan in The Daily Telegraph. How else to explain the absurdity of a stockmarket rally during the worst UK economic decline in 300 years? Launched in 2009 as a “£50bn, one-off emergency response”, the Bank of England’s QE programme is today worth £645bn. Loose monetary policy is “way past the point of doing any good”.