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The UK moves closer to negative interest rates

It has been reviewing its ammunition to tackle the coronavirus crisis since the summer but expressed concerns over the potential counterproductive impact on credit provision if lenders’ profits were damaged.

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Financial markets – already pricing a move into negative territory as economic prospects darken – are forecasting a cut to minus 0.1 per cent by mid-2021.

Allan Monks, a JP Morgan economist, said: “The more it talks about this option the more it looks as if it has all but made up its mind.”

The UK economy is still 11.7 per cent below pre-COVID levels and Threadneedle Street warned: “The recent increases in COVID-19 cases have the potential to weigh further on economic activity, albeit probably on a lesser scale than earlier in the year.”

It has forecast unemployment peaking at 7.5 per cent in the wake of the crisis, which could mean a rise of more than a million in the jobless total. Figures showed the first signs of a rise in joblessness this week. More than 2.7 million people are on Universal Credit.

The winding up of the Government’s furlough scheme at the end of October also threatens the labour market, with an estimated 10 per cent of the workforce still on it, according to the ONS.

Financial markets - already pricing a move into negative territory as economic prospects darken - are forecasting a cut to minus 0.1 per cent by mid-2021.

Financial markets – already pricing a move into negative territory as economic prospects darken – are forecasting a cut to minus 0.1 per cent by mid-2021.Credit:Bloomberg

Policymakers could also have to deal with a transition to no-deal trading with the European Union if talks collapse.

Robert Wood, UK economist at Bank of America Merrill Lynch, said there was a major risk that the Bank could cut rates in November. And he added: “In a no-deal Brexit scenario we expect Bank Rate cut to minus 0.5 per cent in 2021.”

However, George Buckley, chief economist at Nomura, questioned if going into negative territory would be effective, asking: “Is a 20 basis point cut realistically going to address the scale of the crisis that we are seeing?”

Telegraph, London

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