The Bank of England will reveal on Thursday whether it thinks negative interest rates should be part of its toolkit as it mulls further action to bolster the economy.
Most economists believe the Bank will keep interest rates on hold at 0.1%, but could look to expand or up the pace of its £895 billion quantitative easing (QE) programme to help the economy weather a second wave of the pandemic.
All eyes will be on an update of its consultation into the feasibility of below-zero rates in the UK amid mounting speculation over whether it could resort to such a move.
There has been increasing focus on the potential for negative rates for the first time in the Bank’s history, given that it has few options left to boost the economy.
The Monetary Police Committee (MPC) remains split on the issue of below-zero rates, with comments from Bank Governor Andrew Bailey suggesting he is not ready to go down that route.
Economists believe that, while the Bank may say negative rates are possible, it is unlikely to be its preferred measure, with extra QE seen as a less risky tactic for now, having fewer unintended consequences.
Economist James Smith, at ING, said: “It’s now widely expected that policymakers will shy away from taking the plunge into negative interest rates this month.
“In fact, we think it’s unlikely they will do so at all in this cycle.”
He added that the report on negative rates is likely to show “there are challenges, but that the sector could probably cope”.
“Policymakers will be careful not to shut the door on negative rates,” he said.
It comes as the third lockdown is set to see gross domestic product (GDP) – a measure of the size of the economy – tumble in the first quarter of 2021.
This puts the UK on the verge of its first double-dip recession since the 1970s, if it follows on from a contraction in the previous quarter, which was hammered by the November lockdown.
Experts appear divided about whether the economy did contract between October and December, with some believing the UK may narrowly avoid slipping back into recession, defined by two quarters in a row of falling GDP.
A better-than-feared drop in November’s GDP – when it fell 2.6% – has led some to predict that the economy may have proved more resilient.
The EY Item Club’s latest winter forecast predicted that GDP may have flatlined in the fourth quarter, which would mean the UK dodges recession.
Howard Archer, economist at the Item Club, said he believes the Bank’s rate-setters may “look through” the current lockdown hit for Thursday’s rates decision and put further action – and certainly negative rates – on the back burner.
“We would not rule out the Bank acting and, if they do, I think it would be through a further dose of asset purchases,” he said.
“However, I think the odds favour the MPC sitting tight and adopting a wait-and-see approach.”
With the official fourth-quarter GDP figures not due until February 12, the Bank’s quarterly economic forecasts next week will be keenly watched for its predictions.
Mr Archer said the rollout of the Covid-19 vaccine, together with the Government’s move to agree a Brexit deal, has cut the longer-term risks facing the economy.
“The Bank is more likely to look through the very challenging first quarter and focus more on the brighter prospects from the second quarter onwards,” he said.