Will Negative Rates Help the UK Recover from Covid-19 Slump?

Kunal Sawhney, CEO, Kalkine Group. considers the impact negative interest rates could have on investment in the UK

With the pandemic-led slowdown in commercial activities, there has been a perpetual murmur with regard to a negative interest rate regime in the United Kingdom. The Bank of England has been under continuous deliberations over the benefits and expected advantages of negative interest rates for the commercial banks and for the UK economy as a whole.

The enterprises that are facing a drought of business due to repeated lockdowns and extended set of restrictions in the UK are poised to benefit from the negative interest rate framework. Alongside the businesses, there can be a steep reduction in the cost of capital. The availability of capital at a cheaper rate in such a testing time can potentially accelerate the nearly freezed consumption of credit facilities.

In for negative rates:

Silvana Tenreyro, an external member of the BoE’s Monetary Policy Committee (MPC), has recently reiterated the idea of negative interest rates. Tenreyro said the financial market channels have worked effectively under negative rates in other countries leading to higher consumption and investment.

Increased lending has been observed through the banking channels in the countries with a negative interest rate. There is no clear evidence that claims that a negative interest rate system has led to a decline in the overall profit of the banks.

However, a number of factors develop within the banking system that can be hazardous for them, including the increased risk in case of a default by the borrower, the cost of banks’ other funding sources etc.

Conclusive evidence:

There can be several unaccounted aftereffects of a negative interest rate structure for the UK as there is a possibility of variation from expected skewness. With Sweden, Switzerland, Japan and Denmark following the negative interest rate, Tenreyro said that there would not be any material impact on the financial market channels, and negative rates can provide “significant stimulus”.

She observed that no one can have complete certainty about the implementation of negative interest rates, however, it is evident that slashing the bank rate to 0.1 per cent has assisted in loosening the lending conditions and further cuts would continue to provide stimulus.

Factors affecting growth:

There can be a number of persisting factors that can seize the recovery rate even with negative interest rates in place. Like for instance, the unconditionally high rate of daily hospital admissions following the sharp spike in the cases is still horrendous for the health authorities, government and local dwellers.

The situation can be more dreadful as the Health Secretary, and the Chief Medical Officer have separately shown concerns about the daily rise in Covid-19 cases largely due to the newly mutated strain of the virus, which is even more contagious.

Supposedly, if the Bank of England goes ahead to cut the bank rates to negative from the present low rate of 0.1 per cent and the government still goes ahead with stiffer restrictions, the dynamics could worsen further.

As the basic idea of incorporating negative interest rate drives on increasing the consumption and credit offtake. The negative interest rates structure would provide no comprehensive aid in the recovery if the nation is ordered to adhere to the stay-at-home advisory for a couple of months from here.

Barring a few financial entities that are likely to gain from the exchange rate variations and the forthcoming payables and receivables cycle, no other business set-up would realise a profit from this situation. Banks and financial corporations have themselves unrolled their provisions for a number of upcoming quarters and are likely to be in a rigid position till the onset of FY 2022-23.

Therefore, another breather in the business cycle for the enterprises that are still recovering from the Covid-19-laden disruption could hamper the prospects of recovery. Experts feel the banks are likely to remain in a subdued position as the multiple processes that were disorganised due to sudden shutdowns will weigh on the financials.

There could be multiple ways in which the banks might respond to further cuts in policy rates including not passing the full benefits of the cuts to lending rates, modifying the financial instruments in a manner that would leave the transmission mechanism unaffected.

About Lisa Baker, Editor 765 Articles
Lisa Baker is the Editor of Always Finance, and writes about Business, Finance Technology and Healthcare. Lisa is also the owner of Need to See IT Publishing.