IT IS amazing how many words central bankers contrive to use to say little. Often it boils down to nothing being ruled in or out in terms of monetary policy options, but using multiple clauses to say it.
So it was that there was a fleeting frisson yesterday after Bank of England deputy governor Paul Tucker told MPs that, with Britain’s interest rates at historic lows for four years, negative rates on reserves held at the Bank might be considered.
A negative interest rate would allow the Bank of England to charge banks to hold their money, and thereby encourage them to lend out more to householders and businesses instead.
It would be a radical move, even if only symbolically, moving farther along the easier lending path created by the BoE’s quantitative easing programme and Funding for Lending scheme.
But Tucker instinctively “contextualised” the possibility of negative interest rates so quickly at the Treasury committee you could almost hear the tyres in reverse crunching over the pebbled driveway.
The deputy governor said such a policy was just one of a number of ideas put up for consideration within the Bank’s monetary policy committee. He acknowledged installing negative interest rates would be “an extraordinary thing to do” and it needed to be scrutinised. In case of any remaining doubt about the high hurdles to the idea actually being implemented, Tucker added: “I hope we will think about whether there are constraints to setting negative interest rates.”
In short, the evidence was a study in saying Britain’s chronically weak economy behoved the Bank to keep all options, even the radical ones, on the table.
But the coded sub-message was: don’t hold your breath for negative interest rates any time soon, Funding for Lending is ticking along given the economic headwinds, and the £375 billion quantitative easing programme has not run out of road yet (even though there are currently no plans to extend it).
Following the interchange with MPs, financial market traders decided not a lot had changed in terms of BoE policy and bond prices were unchanged. Sounds about right.
Don’t Panic! Oh, sorry, there wasn’t any
The “panic” in financial markets on the expected Italian electoral washout – nobody in real power and more elections likely – looked excitable.
Yes, the Spanish equity market index lost a few per cent, and the interest rate on Italian and Portuguese bonds firmed about 30 basis points.
But the UK’s Footsie shed just 1 per cent or so, French shares were hardly a bloodbath, and Wall Street was in positive territory at the UK close.
Despite unpleasant echoes of the eurozone crisis, the hard statistics therefore showed this was not a case of fear stalking the markets again.
The Italian “result”, if that term doesn’t flatter it, is the biggest jolt the eurozone markets have had since European Central Bank president Mario Draghi stabilised things last summer by saying he would “do whatever it takes” to protect the single currency.
But we are not back to square one, and markets were hardly pricing in some sort of definitive Italian electoral outcome.
Rather, it is more likely to make markets a little nervous for a few weeks before we see whether investors’ nerves have been shot or just rattled.