Negative interest rates are being considered by the Bank of England to expand its policy toolkit and stave off lasting damage from the coronavirus recession, the governor has said.
Andrew Bailey (pictured) stressed that there was no immediate plan to cut rates below zero but confirmation that he wants the option reflects the severity of the crisis. Negative rates would in theory mean banks charging people on their savings to encourage them to spend.
Rates are currently 0.1 per cent, which is considered the lowest they can go. In place of rate cuts, the Bank has been using quantitative easing and forward guidance to stimulate the economy. It is now reviewing a tool that Mr Bailey has previously described as implausible.
“We are doing the assessment of the case for bringing them in as a tool. Not necessarily to use but to put them in the tool box. It is not part of the current decision set,” the governor said in a call with the media after today’s policy decision.
“We are assessing the case for negative rates in this country. We haven’t ruled anything out. It is not a decision that is in any sense imminent. It is work we need to do. We are having to take that evidence [from overseas] and assess the pros and cons of it.
“Were we to decide that it should be in the decision there would be important questions about implementation and about communication.”
Other countries have used negative rates. Denmark has had them for eight years and some of the country’s banks have even experimented with negative-rate mortgages, which pay the borrower.
Small savers have tended not to be affected but banks have imposed monthly charges on corporate deposits and wealthy private client savings.
The Bank decided in 2009 that rates could not go below 0.5 per cent because doing so would backfire and drive up borrowing costs by squeezing bank and building society interest margins.
Lenders make money on deposits, by paying a lower rate than the central bank rate, as well as on loans. If they start losing money on their deposit books, the risk is they increase lending rates to make up the difference.
Negative rates also encourage savers to take their money in cash and put it in a safe. Policy innovations, including a central bank scheme that provides commercial lenders with cheap funding, have since meant that the minimum rate is now thought to be 0.1 per cent.
Even so, as recently as March, Mr Bailey said negative rates were not an option. “I should make clear that as things stand, I do not regard negative official interest rates as a plausible tool,” he told MPs. “Negative rates create the prospect of substitution into cash.”
The minutes to today’s meeting showed that some members of the nine-strong monetary policy committee want the Bank to be ready to act if there is a second spike in infections or if behaviour does not change despite lockdown.
“In an environment of heightened uncertainty, some members in this group also envisaged a role for monetary policy in seeking to mitigate the potential impact of more adverse economic scenarios, including those in which there were higher rates of Covid-19 infection going forward,” the minutes said.
Mr Bailey said: “Some members put more emphasis on [these concerns] and thought monetary policy could counteract that.”