Yowch!
Remember the hooplah over UK banks hoarding all that lovely QE money instead of passing it into the banking system? Well, the BoE’s Mervyn King said on Tuesday that he was ready to reduce the rate paid on deposits held at the central bank — a la the Swedish example — to make them lend.
As he put it (thanks to RBC Capital Markets for the quote):
“Of course people have talked about whether it would be sensible to reduce the rate at which those reserves are remunerated and it is something which we are looking at.
“I think we certainly would not want to reduce the rate of remuneration on a certain level of reserves, that is part of the framework, but above some normal level we could have a lower rate at which they are remunerated.
“That would not change the overall level of reserves in the banking sector, that is determined by our asset purchases. What it would do is perhaps make the banks work a little bit harder to try individually to convert some of those reserves into other assets.”
“If you just reduce the rate at which you remunerate reserves that won’t convert it into lending to businesses but it might mean that they would purchase more short term gilts for example which would be adding to the effective size of the asset purchase scheme.”
Meanwhile, as Bloomberg reported bond prices reacted somewhat decisively to the news:
Sept. 15 (Bloomberg) — U.K. government bonds pared their decline after Bank of England Governor Mervyn King said he may reduce the rate it pays on deposits held at the central bank. The yield on the 2-year gilt was 2 basis points higher at 0.89 percent as of 10:28 a.m. in London, after earlier rising as much as 5 basis points.
And rightly they should, because any changes to the BoE deposit regime constitutes a massive overhaul of established policy. In effect, it means the Bank is ready to throw all previous protocol out of the window as it continues to battle with deflation fears –and possibly also ready to entertain more outlandish concepts like negative rates, previously only advocated by economists like Willem Buiter.
Über QE here we come.
Related links:
Negative interest in cash, or goodbye banknotes – FT Alphaville
How to deal with bank hoarding - FT Alphaville