Interest rates in focus ahead of key week for central banks

Lucy Harley-McKeown
·2-min read
LONDON, ENGLAND - MARCH 16: Bank of England Governor Andrew Bailey poses for a photograph on the first day of his new role at the central bank on March 16, 2020 in London, England. (Photo by  Tolga Akmen - WPA Pool/Getty Images)
Bank of England Governor Andrew Bailey. Photo: Tolga Akmen - WPA Pool/Getty Images

It’s a big week for central bank announcements, as monetary policy watchers across Europe hone in on potential new action.

A year on from the spread of the pandemic, policymakers are still doing all they can to keep economies afloat, as lockdowns remain to stem the spread of the virus.

Central banks across the world slashed their interest rates, and there has been speculation that some might bring them below zero to encourage people to spend money, although market expectations remain that rates will be held for the foreseeable future.

Unheard of a decade ago, negative rates were widely pursued across Europe in the wake of the 2008 financial crash. The deposit rate at the European Central Bank (EC) remains negative.

The BOE has gone back and forth on whether negative interest rates could be a reality for the UK.

On Thursday, the Bank of England (BOE)’s monetary policy meeting minutes and policy summary will be released to the world, shedding further light on the bank’s potential future moves.

Back in October, the BOE wrote to banks to see how ready they are for zero or negative interest rates.

In the letter, deputy BOE governor Sam Woods said the central bank is “requesting specific information about your firm’s current readiness to deal with a zero Bank Rate, a negative Bank Rate, or a tiered system of reserves remuneration – and the steps that you would need to take to prepare for the implementation of these."

READ MORE: Week ahead in markets: Bank of England rate paths, a glut of EU data, US jobs and stimulus

The European Central Bank is also due to make a statement on Wednesday, which could give indications of new QE or rate movements.

Watch: Will interest rates stay low forever?

ECB board member Isabel Schnabel said on Sunday that raising interests right now would serve the economy a devastating blow, adding that temporary spikes in inflation should not be confused with a trend.

Speaking on German public radio, she said: “I can’t say when a rate increase will come, but what I can say is that a hike in the current environment would have a devastating impact and nobody should want that.”

She said that German inflation were likely to rise this year, due to its VAT cut and a base effect from energy costs, but that should not be confused with a sustained rise in inflation. She noted the difficulty with measuring inflations during lockdowns.

Watch: What are negative interest rates?