"Going Negative Could Be Positive" writes Philip Aldrick in the Times today. The economics editor has been talking with Michael Saunders, an external member of the Monetary Policy Committee at the Bank of England.
Rates could be cut a little below zero, the former Citigroup economist explained, as long as "appropriate mitigations" are in place.
The Bank has asked commercial lenders to ensure they are systems ready for a move below the line. Bankers have warned, negative rates could hit profits and create operational problems. Not so argues Saunders, "studies have shown, the net effect of negative rates on bank profitability is small and may be slightly positive."
Negative rates rates could increase economic growth and reduce the impact of bad debts as the economy expands, it is said. "Studies which allow for these indirect effects suggest the net effect on bank profitability is small and may even be slightly positive."
Well of course it is. The model used is a tautology. Model in sufficient growth with a fall in defaults and bank profitability will rise. No wonder Andrew Bailey Governor of the Bank if England is slow to make the move. Stuck on Planet ZIRP, we should avoid the drift towards the NIRP crevasse.
The Governor has already abandoned the pretense of QE. The minutes of the MPC committee in June, reveal the committee voted to increase the stock of UK government bonds "financed by the creation of central bank reserves.
Last month Andy Haldane Chief Economist at the Bank of England, delivered a speech entitled “What Has Central Bank Independence Ever Done For Us?
An appropriate attribution to Monty Python, with a hint of satire, he explained, the Bank of England creates a high level of central bank reserves to acquire government gilts.
“This is process is not a monetary financing of government deficits. It is a reflection of both policies [monetary and fiscal] responding counter-cyclically, as they should, in the face of a very large cyclical shock to aggregate activity.” Ah ...
Central Bank Reserves have now increased to almost 50% of GDP. This is not officially “Monetary Financing of Fiscal Deficits” or “Fiscal Dominance”. It sure looks like it. We call it Dire Straits Economics, that’s “Money For Nothing, Gilts For Free”. No need to compound the challenge and take the risk of a move to negative rates ...
Fiscal dominance is an economic condition that occurs when a country has a large government debt and deficit such that monetary policy targets keeping the government from bankruptcy rather than macro-economic targets such as inflation, growth and jobs.
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