Pound falls as Bank of England hints at negative interest rates
THE pound has plummeted today after the Bank of England hinted that it could implement negative interest rates. The central bank today agreed to hold the base rate at a record low of 0.1 per cent but added that it may drop below zero in the near future. The Bank said that it plans to […]
THE pound has plummeted today after the Bank of England hinted that it could implement negative interest rates.
The central bank today agreed to hold the base rate at a record low of 0.1 per cent but added that it may drop below zero in the near future.
The Bank said that it plans to “explore how a negative Bank Rate could be implemented effectively” but only if inflation and GDP don’t continue to improve.
Shortly after the comments, the pound fell around 0.1% against the dollar and 0.9% to the euro.
Against the dollar, it fell to as low as $1.2883 – a cent below where it had been before the midday announcement.
Although it seems like the value of sterling has dropped dramatically today, it is not even close to its lowest point over the past week.
Last Friday the pound was weakest against the dollar when it sunk to $1.2779.
The pound also dropped against the euro today to €1.0911, from €1.1008 at 8am this morning.
Again, sterling still isn’t at it’s weakest against the euro across a seven day period – it hit a low of €1.0776 at the end of last week.
All nine members of the central bank’s Monetary Policy Committee (MPC) voted to leave interest rates as they are and keep its quantitative easing programme in a bid to boost the economy during the coronavirus crisis.
Banks and building societies use the base rate to set its own interest rates on savings and loans.
If interest rates turn negative, borrowing becomes cheaper for consumers but it means that savers will effectively pay for banks to hold their cash.
What does negative inflation mean?
NEGATIVE inflation - or deflation - is when the price of goods or services is falling.
Some experts have said we could see negative inflation as a result of coronavirus pressures on the economy.
This would mean lower prices for consumers, which on the surface is a good a thing.
But the Bank of England points out that when prices fall, people often don’t make purchases as they hope costs will fall further.
And when people stop buying, less money is going to businesses and into the economy, and in turn those businesses may cut wages or make job losses.
It can also mean your debts get more expensive, as the amount you owe remains the same, yet you may find it harder to repay debts or the item, such as house or car, may depreciate in value compared to its initial worth.
Some experts predict that negative interest rates could be on the horizon following the catastrophic economical impact of the pandemic lockdown.
But the BoE said today that it would only discuss the possibility with the Prudential Regulation Authority over the final three months of the year and not that they were guaranteed.
It added that while the “outlook for the economy remains unusually uncertain”, recent data shows it has performed “a little stronger” than expected.
It comes a day after inflation plunged to 0.2% in August from 1% in July, largely due to the government’s Eat Out to Help Out scheme.
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Inflation measures the cost of living by looking at the price of goods, such as groceries and mobile phones, and services such as haircuts and rail fares, and how it’s changed over time.
Data from the Office for National Statistics (ONS) also showed the economy grew by 6.6% in July in another promising sign that Britain is bouncing back.
But there are fears that economic recovery will be halted by mass unemployment expected once the government’s furlough scheme ends in October.