A cut in Bank of England official rates is not the central expectation here, and is certainly not recommended, but is worth considering for the following reasons:

1. Other central banks have made or are considering changes to remuneration arrangements for bank reserves and the Bank of England is a devoted follower of fashion. The ECB this month lowered its main refinancing rate, which is also the rate paid on required reserves, from 0.5% to 0.25%, while President Draghi stated that a cut in the rate on excess reserves (i.e. the deposit facility rate) from zero to negative was discussed. The latest FOMC minutes, meanwhile, revealed that “most participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering” in order to anchor short-term interest rates and reinforce the Committee’s forward guidance.

2. The ECB cut means that the rate paid on UK reserves is the highest of the major central banks. The Bank of England pays Bank rate of 0.5% on reserves versus 0.25% / 0.25% on required and excess reserves in the US, 0.25% / 0% in the Eurozone and 0% / 0.1% in Japan. The MPC may be concerned that a widening differential is contributing to upward pressure on sterling.

3. The MPC believes that the rising rate path discounted in markets is too hawkish and is acting as an unnecessary growth drag. This was signalled in the November Inflation Report by a mean forecast that inflation would be slightly below target in two years’ time if Bank rate followed the market-implied path. Market rates have failed to adjust lower despite Governor Carney reaffirming dovish forward guidance. An official rate cut could “shock” markets into accepting the MPC’s desired rate path and could be defended as a response to recent lower-than-expected inflation.

4. The MPC has previously ruled out a cut in Bank rate on the grounds that it could constrict credit supply by reducing the profitability of some lenders, especially building societies. The funding for lending scheme, however, has allowed lenders to widen margins, possibly lessening this concern.

The Bank could choose simply to cut Bank rate by 25 basis points to 0.25% but would be more likely to emulate the ECB by reintroducing reserve requirements, paying a lower rate on excess balances held in the standing deposit facility – maintaining Bank rate, and the rate on required reserves, at 0.5% would mitigate point 4 above. Setting the deposit rate at 0.25% would result in the overnight rate dropping to about this level from 47 basis points currently, with a knock-on effect along the money market yield curve.