Bank of England could launch another £100bn stimulus as markets begin to price in negative rates next year

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The Bank of England could launch a further stimulus package worth as much as £100billion before it cuts rates to below zero, economists are forecasting.

Economists say interest rates are likely to remain at 0.1 per cent when the Bank meets this week.

But data firm Bloomberg said the money markets are already beginning to price in a cut to negative in the second quarter next year. And one expert has even raised the possibility of the Bank at some point introducing restrictions on the use of cash.

A move to negative interest rates – the first time ever in Britain – would mean commercial banks being charged to lodge their money with the Bank, and those charges, in turn, would be passed on to their customers.

The hope would be that this would encourage banks to lend and prompt firms and households to spend rather than save, thus giving a lift to the economy. Bank governor Andrew Bailey is expected to publish a report this week into the prospect of negative rates after warning in June they were a possibility.

Since the onset of the crisis, the Bank has beefed up its programme of money creation, or ‘quantitative easing’ (QE), taking the total from £445billion to £745billion.

Howard Archer – chief economic adviser to the Item Club, which uses the Treasury’s computer model of the economy – said he expected more QE later in the year.

Douglas McWilliams – deputy chairman of the independent Centre for Economics and Business Research – said that with soaring levels of business failures and job losses expected between now and the middle of next year, we may well require a mixture of QE and negative rates just to keep the economy afloat.

But he warned that, without controls on the use of physical money, negative rates would simply see cash stored ‘under the mattress’. He added: ‘It will be interesting this week to see if the Bank suggests restrictions on cash usage.’

Such restrictions could range from a ban on cash, thought to be unlikely, through limiting ATM withdrawals, requiring all self-employed people to register for VAT, reducing higher denomination banknotes and encouraging the larger retail chains to phase out the acceptance of cash for anything other than small items.

Chris Williamson, chief business economist at IHS Markit, said: ‘I don’t think negative rates are imminent. But the Bank will need to produce more stimulus from somewhere. It will have to face the reality the recovery from earlier in the year is losing momentum.’

Reference: This is Money: Dan Atkinson For The Mail On Sunday 17 hrs ago: 1st August 2020