BoE's Broadbent says monetary policy may loosen

The Bank of England may ease monetary policy still further after cutting interest rates to new record lows during the Covid-19 crisis, Deputy Governor Ben Broadbent said.

Broadbent said the central bank was keeping all options under review, including cutting the benchmark rate below zero from 0.1%, though he said that action could do more harm than good.

“The committee are certainly prepared to do what is necessary to meet our remit with risks still to the downside,” Broadbent told CNBC. “Yes, it is quite possible that more monetary easing will be needed over time.”

His comments lent weight to the views of economists who argue the BoE's monetary policy committee is preparing to increase its purchases of bonds to keep market interest rates low.

The MPC voted unanimously to keep rates on hold on 7 May but two members of the nine-strong committee called for an extra £100bn of bond purchases on top of the existing £645bn target. Economists took the split vote to mean more bond buying was likely.

Broadbent said measures' potential to stimulate demand would be judged against the impact on banks' ability to lend. Negative interest rates charge banks for deposits with the BoE, hitting profits. Broadbent said cutting rates to lower than during the financial crisis had been possible because banks' balance sheets were stronger.

He said banks needed to keep lending to companies and that the risk of some businesses becoming overburdened with debt was outweighed by the prospect of "good companies not getting sufficient funds".

Broadbent rejected the idea that the BoE would finance the government's fiscal measures to deal with the crisis. The BoE has agreed to let the Treasury use its "ways and means" overdraft at the central bank to smooth cash flows but not for long-term borrowing.

“It is not surprising when you have a huge hit to the economy, as is the case now, as was the case in 2009, that you see easing on both fiscal and monetary fronts,” Broadbent said. “That is the connection – they are both responses to a weaker economy. It is not the case that one is a response to the other.”