the monetary policy toolbox in the uk speech given by dave ramsden, deputy governor for markets & banking society of professional economists 21 october 2020 with thanks to renee horrell and tom smith for their assistance in preparing these remarks and to staff across markets and bpi and elsewhere in the bank for their many contributions, as well as to my colleagues on the mpc for their helpful comments and suggestions. all speeches are available online at www. bankofengland. co. uk / news / speeches and @ boe _ pressoffice 1. introduction it ’ s a pleasure to be speaking once again at the society of professional economists ’ annual conference. when i last addressed this conference it was two years ago, in person, in the impressive surroundings of the bloomberg building near to the bank of england. today we ’ re meeting in rather different circumstances, and for many of us at least in slightly less impressive surroundings! i'm delighted that we are able to meet virtually, and i'd like to thank kevin daly and all the spe team for their work to make this event possible. the theme of today ’ s conference is “ policy challenges for the global economy ”. what i want to do as my contribution to that theme is to give you my perspective, in my role as deputy governor for markets, banking and resolution at the bank of england and member of the uk ’ s monetary policy committee ( the mpc ), on one part of our response to the particular policy challenges of the covid pandemic. and i will frame my contribution in terms of the use the mpc has made of what has come to be known as the “ monetary policy toolbox ” : the range of policy tools that mpc has used so far, what tools are available to us now, and which ones we might decide to use in the near future. the idea of a range of monetary policy tools is itself quite a new one. for many years monetary policy makers used one tool, the policy rate, to achieve their goal – in the uk case, that meant bank rate. and the bank used a small, focused set of central balance sheet operations to keep money market rates, and so rates in the wider economy, close to that policy rate. two developments changed all that : first, the secular decline, over several decades, in the trend real interest rate ; and second, the global financial crisis and the great recession that followed it. 1 the trend real rate – big r *, in

the impact of individual policy actions by clarifying policy maker intentions, and can link separate policy actions together into a coherent package – in the words of the bis committee on the global financial system, providing “ connecting material ” and “ giving meaning ”. that is consistent with how the mpc have used it in the past and in its current incarnation. c. negative rates – in the toolbox the final tool that i want to cover today is bank rate, and specifically the question of whether bank rate could go negative. the mpc set out its collective assessment of the potential issues that a negative policy rate in the uk could raise, and how that might impact the effectiveness of negative rates as a monetary policy tool, in its august 2020 monetary policy report. 13 i won ’ t repeat all of the analysis from the report ; instead i want to draw out three key points. the first is that the effective lower bound is likely to be different across different countries, reflecting different macro - economic circumstances, structural features and financial systems. this is a simple point but an important one. just because negative rates are appropriate in one country does not mean they would be appropriate in another, and for some countries and in some circumstances the effective lower bound may well be positive. the second point is that while some aspects of the transmission mechanism would be the same as any other rate cut, others could be quite different. in all use - cases, market interest rates would fall, asset prices would rise and the exchange rate would depreciate, and that would stimulate demand and raise inflation in the usual way. but evidence from other countries ’ experience suggests that while corporate deposit rates can turn negative, household deposit rates would be unlikely to fall below zero, meaning that pass - through could be somewhat weaker than for a normal rate cut. building on this, the third point i want to draw out is that there can be knock - on economic effects through the banking system. these effects could reduce or even counteract the stimulus from negative rates. if deposit rates don ’ t fall but loan rates do, that will impact banks ’ profitability, particular for those who are most reliant on retail deposit funding – in the uk that is small banks and building societies. banks can offset the impact on profitability by not reducing lending rates, but in doing this they would further reduce the amount of stimulus provided. some banks, particularly those already under balance sheet pressure, could even be incentivised to reduce lending. that would be