"It would be wrong to claim a tool is in your toolbox if you aren’t able to use it when it’s needed."
Speaking during an online conference, Ramsden discussed whether Bank Rate could go negative.
Explaining whe he thinks now is not the right time to lower rates further, Ramsden noted that the economy and the financial system are "already grappling with the effects of an unprecedented crisis, as well as the myriad uncertainties the crisis has created".
However, he added that negative rates are "certainly in the toolbox for potential use in future", adding that the MPC "will keep the appropriateness of all tools, including negative rates, under review".
In its August Monetary Policy Report the MPC said that, given the effects of Covid-related disruption on banks’ balance sheets at present, “negative policy rates at this time could be less effective as a tool to stimulate the economy”. Ramsden said that "that consideration still applies as far as I am concerned".
He added that evidence from other countries’ experience suggests that while corporate deposit rates can turn negative, household deposit rates would be "unlikely to fall below zero", meaning that pass-through could be somewhat weaker than for a normal rate cut.
Continuing, Ramsden said: "There can be knock-on economic effects through the banking system. These effects could reduce or even counteract the stimulus from negative rates. If deposit rates don’t fall but loan rates do, that will impact banks’ profitability, particular for those who are most reliant on retail deposit funding – in the UK that is small banks and building societies. Banks can offset the impact on profitability by not reducing lending rates, but in doing this they would further reduce the amount of stimulus provided. Some banks, particularly those already under balance sheet pressure, could even be incentivised to reduce lending. That would be a particular concern in the current situation where, while the banking sector as a whole starts from a position of strength, risks to balance sheets are likely to be rising."
Ramsden said it is for that reason that the Bank is taking steps to understand how negative rates might be implemented in practice.
The Bank of England recently sent a letter to CEOs of all UK banks and building societies, as well as large international banks and insurers, asking them to identify any operational challenges associated with implementation of zero or negative Bank Rate.
Ramsden said the information it receives will deepen the MPC’s understanding of the operational aspects of a negative policy rate, as well as the Bank and PRA’s understanding of its implications for firms and the UK financial system.
Ramsden concluded: "It would be wrong to claim a tool is in your toolbox if you aren’t able to use it when it’s needed. For that reason, in my own areas of responsibility in the Bank, we are working to ensure all our systems would be able to handle negative rates if needed."
