With central banks, it’s often not what they say that counts, but what they don’t say.
Today was no different. For all the attention the Bank of England got for QE and cutting back on its economic forecasters’ happy pills, it was the lack of talk about negative interest rates that was the most important development.
Monetary policy committee members have teased us over the past few weeks by mentioning how negative rates might help get us out of our economic mess.
Today, though, this much-discussed topic merits barely a whisper.
Good.
Fans of negative rates say they’d encourage people to spend rather than save, boosting demand in the economy.
But there’s a fundamental flaw; people still won’t spend if they fear for their jobs. And until Covid-19 is fixed, that fear will remain. Brits will just stick their savings as cash under the metaphorical mattress.
Meanwhile, negative rates will hugely damage the profitability of banks, actively discouraging them from lending to households and businesses.
That would crimp spending and growth, exacerbating the crisis.
There’s another factor to consider, too: Europe and Japan have gone negative for some time. But their citizens tend to be thrifty savers.
Brits and Americans are the opposite. We like to borrow and spend, and run up big deficits funded by foreign investors. If we started punishing those investors by slashing their returns even more, they’d invest elsewhere. Then we’d be in trouble.
On this issue at least, the Bank, and the Fed, are right to stay positive.
