Andrew bailey made it clear on tuesday that the bank of england was not about to push interest rates below zero in the near future.
Speaking on a british chambers of commerce webinar, the boe governor said the central bank needed to be sure it could set a negative rate, but that did not mean it was about to use the policy.
The governor said: yes its in the tool bag, but that does not imply anything about the probability of us using negative interest rates at the moment.
Having fallen sharply against the us dollar in early morning trading, sterling reversed the losses on tuesday morning after the webinar to stand at $1.2796 in mid-morning trading.
The boe has said since august that its toolbox of monetary policy levers included negative rates, and the minutes of its september monetary policy committee meeting stated that it was looking at the practical implications of using the policy.
This caused a flurry of speculation in financial markets that the boe was about to set a negative interest rate, with future interest rates markets expecting negative rates by the mpcs february meeting.
Mr bailey damped this speculation by saying that the reference to negative rates in the september mpc minutes was just stating the obvious fact that if the boe wanted to use negative rates at any time in the future, it needed to be sure that commercial banks were able to implement the policy and transmit it to markets without systems blowing up.
It would be a cardinal sin if we stated we had a tool in the box, which in practice we didnt think we could operationally use...so it is no surprise were going to do this work. its going to take time because theres quite a lot of technical complexity, mr bailey added.
To reiterate the point, the governor said, nobody should read more into [the statement] than thats the next stage of the work to ensure commercial banks were able to set a negative rate if the mpc decided to use it.
Dominic white, an economist at absolute strategy research, said the boes communication hasn't exactly been clear on negative rates. in some cases the easiest thing to do is keepthe message simple, but the bank is trying to be very nuanced about this, he said. by trying to be equivocal about the benefits, they've left a lot of people thinking they're on the verge of bringing in negative rates.
The governor was downbeat on the uk economy, saying the hard yards are ahead of us, with coronavirus cases rising, a weak labour market and persistent scars from the crisis likely to depress activity for a long time.
While he said there was a case for looking at the economy with a glass half full mindset, the latest evidence of the resurgence of covid-19 suggested the fourth quarter would be difficult for the economy with the pandemic posing a major threat.
The latest news is were seeing a much faster and larger return of covid and thats obviously extremely difficult news for all of us in the country, he said. that does reinforce the downside risks in our forecast... and the boe is going to do everything we could do in our remit and powers to support the people and businesses of this country. and we will do that.
He reiterated that the boe would not raise interest rates until there was a lot of very strong evidence that the economy was recovering strongly and significant progress had been made to eliminate spare capacity in the economy.
Additional reporting by tommy stubbington