KPMG chief economist: Negative interest rates ‘unlikely’ but government support key

KPMG chief economist: Negative interest rates ‘unlikely’ but government support key

ACCA adds that “fear indices” are still unusually high

KPMG chief economist: Negative interest rates ‘unlikely’ but government support key

Negative interest rates are “unlikely” to come into force this year as the UK economy has proven to be more “resilient” than expected, says KPMG UK’s chief economist, Yael Selfin.

There was speculation that negative rates could be introduced in May after a speech by Silvana Tenreyro, member of the Bank of England Monetary Policy Committee, suggested she would be open to the prospect of negative rates.

However, figures from the Office of National Statistics (ONS) found inflation increased from 0.6 percent in November 2020 to 0.8 percent in December 2020, suggesting the economy is strong enough to get by without a further rate cut.

“Even though we have another lockdown and the pandemic is dragging a bit, the economy seems to be a bit more resilient. The Bank of England will probably try and save that spare ammunition [of negative interest rates] for another shock… If there’s another shock, they won’t really have much more they can do,” Selfin says.

“They want to potentially reserve a little bit of firepower in case something happens, and God knows what can happen – we didn’t think there would be a pandemic.”

While Selfin doesn’t believe negative interest rates will be bad for the economy, it can have a limited impact on small business. Instead, she says looking to government support measures would be a better approach.

“The trouble at the moment is that the economy’s weak because we can’t actually operate. So, by lowering interest rates, you’re not actually going to make those sectors that are shut operate, they just can’t operate, so it’s not that effective.

“At this stage, the government can help more [than the Bank of England] first of all by trying to get rid of the pandemic as quickly as possible – that’s the best tool. And the other one is supporting businesses through loans, through the job retention scheme, and anything else that they can do to give some clarity and certainty to people, so they can plan.”

The Association of Chartered Certified Accountant’s (ACCA) chief economist Michael Taylor agrees , a further rate cut would not likely to be used. He says one of the key concerns is whether negative rates could dissuade banks rather than encourage them to lend.

“I sense a reluctance to deploy them [negative interest rates], although they clearly haven’t ruled it out,” says Taylor.

“They [the government] do seem to emphasise this issue of concern about the effect of negative interest rates on banks’ profitability. Obviously, if you’re hurting banks’ profitability through negative interest rates, then they’re going to lend less and that’s damaging,” he adds.

Selfin adds that for small businesses using credit cards, it is unlikely to have a huge impact.

“Credit cards, for example, aren’t very sensitive to changes in interest rates, they remain quite fixed. There’s a question mark as to how much of that cut they actually get,” Selfin says.

ACCA’s Global Economic Conditions Survey for the fourth quarter suggests the global economy is still in a precarious state with the “fear indices”, which measures the concern that customers and suppliers will go out of business, remaining well above the pre-pandemic long-term average.

However, Taylor says that with the vaccine rollout going particularly well in the UK, there should be a strong pickup in demand through the second half of the year, meaning accountants should start preparing their clients for better times ahead.

 

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