Citi says UK negative rates could be 'when, not if'

Citi said the question about whether the Bank of England adopts negative interest rates could be a matter of 'when, not if" as the central bank gives the move serious consideration.

Global neutral rates are continuing to decline including in the UK with perhaps a 100-120 basis point drop since 2018, Citi said. The Covid-19 crisis and Brexit could accentuate this trend.

Negative policy rates could be necessary in future downturns unless the trend reverses and the UK could be the first economy with a big current account deficit to try negative rates, Citi said.

Though a cut in Bank rate to below zero is not imminent the BoE may test negative lending rates on its term funding scheme for SMEs and tone down its current message about the lower bound being slightly above zero, Christian Schulz, Citi's European economics analyst said in a note to clients.

The BoE's monetary policy committee is considering whether to cut interest rates below zero. Having almost ruled out such a move earlier in the Covid-19 crisis officials have softened their line to say negative rates are under active consideration.

Schulz said in a note to clients: "The MPC may look at tiering and cut to negative if 1) the next shock to the economy (for example Brexit) hits before the current one is fully absorbed and 2) financial strains remain broadly contained."

The BoE has raised doubts about the effectiveness of negative rates, which charge banks to park money with the central bank. Officials have also warned negative rates can hit bank profits, making lending more difficult.

Citi said if neutral rates kept falling negative rates would be almost inevitable.