The head of fixed income at Rathbones Unit Trust Management has warned against introducing negative interest rates in the UK, saying they would be particularly bad for the economy.
Negative interest rates already exist in the Eurozone economies, in Switzerland, and in certain Nordic countries. And now the Bank of England's Monetary Policy Committee said in minutes released on September 17 that the central bank is “exploring” the possibility of introducing negative rates in the UK.
Bryn Jones said the present state of the economy probably meant that further action will be needed. But he said negative rates would be particularly bad as they would hit banks and fund houses, which make up a very significant part of the UK economy.
Mr Jones said: “I still think negative rates are the nuclear option and pressing that button is going to be a tough call. Considering the financial industry is one of the UK’s main focuses I still think it’s like shooting your own toes off.”
Chris Iggo, chief investment officer for core investments at Axa Investment Management, said many of the effects of negative interest rates have already been seen in the market in the period since the minutes were released.
He said government bond yields have already fallen as a result of the market being concerned about negative rates.
Mr Iggo said: “Sending messages about future policy reactions is enough while keeping actual operational changes in reserve.”
Michel Perera, chief investment officer a Canaccord Genuity Wealth Management, believes negative interest rates have not worked when deployed in other parts of the world.
He said one of the problems is that consumer and investor confidence is hit because the public find the concept of negative interest rates so extreme that they worry all is not well.
This prompts them to be more cautious about spending or investing and so economic growth doesn’t take off, which is precisely the opposite of the impact policy makers hope will happen, he said.
Policy makers generally hope that with interest rates in negative territory, companies and individuals will not wish to hoard cash, and will instead spend and invest and that banks will be reluctant to hold onto cash, and so will increase lending.
All of this activity would then lead to an increase in economic growth.
Hinesh Patel, portfolio manager at Quilter, said: “The noise around the introduction of negative interest rates refuses to go away, and while we still think it is unlikely, with the way the Brexit negotiations are going Andrew Bailey does have that as a nuclear option."
He believes any such change would be a 2021 event rather than this year at the soonest.
david.thorpe@ft.com
