Not so all-powerful.

Photographer: JUSTIN TALLIS/AFP/Getty Images

Memo to Carney: The U.K. Already Has Negative Rates

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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Negative interest rates, according to Bank of England Governor Mark Carney, are "a bit wrong." As is often the case these days, though, financial markets rather than central banks are dictating the cost of money, and the U.K. is already seeing some key borrowing costs drop below zero, a move that Carney says has produced "negative consequences" elsewhere.

QuickTake Negative Rates

Yields on both the 4.75 percent gilt maturing in March 2020 and on the 3.75 percent gilt repayable in September 2019 dropped below zero on Wednesday. The march lower in government borrowing costs in the wake of the Brexit vote, anticipating that monetary policy would have to ease, has been relentless:

Unveiling a suite of measures earlier this month designed to safeguard the British economy against the aftershocks of the referendum to leave the European Union, Carney said he and his monetary policy committee are "very clear that we see the effective lower bound as a positive number, close to zero, but a positive number." He repeated his aversion to negative rates several times.

He's already had to backtrack on what seemed like a cast-iron pledge that the next move in interest rates would be higher, not lower -- a sensible reversal given the economic uncertainties Brexit has caused. Opposing negative rates so vehemently, though, seems to leave Carney a hostage to fortune.

Recall that European Central Bank President Mario Draghi had been similarly opposed to rates below zero in 2014, only to perform an about-face in October 2015:

How come that we announced a year ago that that was practically the zero lower bound, and now we are thinking of going into further negative territory? Given the conditions prevailing a year ago, that was a statement. Today, things have changed.

The Bank of England's failure on Tuesday to persuade bondholders to sell it all of the bonds it was seeking under its recently expanded quantitative easing program is further evidence that monetary policy is reaching the limits of its effectiveness. (Click here to read about that shortfall.)

The moves in the U.K. government bond market suggest that traders and investors are skeptical of Carney's ability to keep the official interest rate above zero. With central banks in many countries now pushing on a string, there's an increasing likelihood that U.K. borrowing costs will detach themselves from where the central bank is trying to guide them, especially if the economic outlook continues to deteriorate. The zero bound turned out to be illusory in the euro zone and Japan; Carney may find himself backtracking once again.

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