Bank of England Rates

2020-Dec-23

Will the Bank of England set its Bank Rate to below zero?

GJOpen asks:

"Before 7 May 2021, will the Bank of England set its Bank Rate to below zero?"

I estimate the probability that Bank of England will set its Bank Rate below 0 is 6%.

Base rate

Since 1900, the Bank of England has released over 400 rates. It has never released a negative bank rate. Naively, the base rate is less than 1%:

> options(digits=2)
> binom.test(0, 400)

      Exact binomial test

data:  0 and 400
number of successes = 0, number of trials = 400, p-value <2e-16
alternative hypothesis: true probability of success is not equal to 0.5
95 percent confidence interval:
 0.0000 0.0092
sample estimates:
probability of success
                     0

This includes:

The Great Depression (1929 - 1939)
Two world wars. The end of WWI caused comparable reduction in Real GDP Growth (~9.5%)
The 1973 Oil Crisis
The Great Recession and Financial Crisis (2008 - 2009)
Initial COVID-19 impact

Local effects

Increasing probability

The Monetary Policy Committee expects UK GDP to decline in 2020 Q4, given the rising cases of COVID-19 and Brexit. However, the Committee voted to hold the Bank Rate at 0.1%.

I expect that a no-deal Brexit would lower the GDP expectation even further.

The seasonally-adjusted unemployment rate is increasing, but it's still lower than the peak when COVID-19 restrictions were first introduced.

There is a new variant of COVID-19 which is more transmissible. The UK responded with so-called "Tier-4" restrictions. The majority of the population isn't allowed out of their house without a "reasonable excuse."

Finally, the bank rate is very low at 0.1%. It's not a big leap to go negative.

Decreasing probability

The UK was one of the first (the first?) countries to approve the Pfizer/BioNTech COVID-19 vaccine. The UK roll-out started on Dec-08. There are other vaccines in phase 3 trials, with the Medicines and Healthcare products Regulatory Agency revieinwing the Oxford/Astrazeneca vaccine. In short, the UK may be able to roll out more vaccines soon without relying only on Pfizer.

Negotiations are tricky, especially when they are as broad and politically-charged as the Brexit dealings. However, it is often not in folks' best interests to agree early. If you agree earlier, then you lose the chance to get concessions from the other side. You can also portray your opponents as "unreasonable" to your public for the duration. Finally, when a deal is reached in the middle of the night, you claim victory, snatched from the jaws of defeat. It was your wiles, your wit that won the day. The UK Govt' seems to be engaging in this kind of brinksmanship

Overall probability

I'd say there are 2 factors that decrease the probability and 5 that would increase it.

If each factor is responsible for 1 - 2%, then the overall change is +4.5%. This makes the final estimate 6%.