Negative interest rate threat to banks
Published 27/02/2013 | 04:20
The Bank of England has considered introducing negative interest rates in an effort to force commercial banks to lend more.
Deputy governor of the central bank Paul Tucker said the Monetary Policy Committee had discussed the idea of dropping rates from the current all-time low of 0.5% into negative territory because other attempts to get banks lending to small and medium-sized enterprises weren't going far enough.
"I hope you will think about whether there are constraints to setting negative interest rates," he told a parliamentary treasury select committee yesterday. "This is an idea that I have raised. This would be an extraordinary thing to do. It needs to be thought through very carefully."
The theory behind setting a negative interest rate is that the central bank would, in effect, charge commercial banks for holding their cash, therefore encouraging them to lend more.
Such a move has been discussed by other countries in the past but there are worries that savers would be hit hard.
Also, negative interest rates are not guaranteed to get banks lending as they might instead decide to hold cash themselves or merely buy cash investments.
But news that the bank has been thinking of other ways to boost the economy will be welcomed, particularly following the recent downgrade of the UK's credit rating. That's not to say Mr Tucker believes quantitative easing (QE) – the process whereby the central bank puts more cash into the economy by buying bonds – isn't working, nor that he's ruled out another round of
He said: "I would also judge that the existing degree of monetary easing from QE is likely to gain more traction on spending than it had last autumn, given reduced tail risks from the international environment. I remain open to doing more QE depending on the outlook for demand and inflation.
"We should not start to withdraw monetary stimulus until we have achieved what I called escape velocity: the economy growing, and being set to continue to grow, at a pace that gradually absorbs the slack in the labour market and within firms.".