The Deputy Governor of the Bank of England (BOI) has spoken out against setting negative interest rates, which would bring the cost of borrowing less than zero.
“Currently, negative policy rates are less effective as a tool to stimulate the economy,” Sir Dave Ramsden told the Society of Professional Economists (SPE).
The bank has so far responded to the epidemic by lowering the rate to just 0.1 per cent.
But some policymakers want to do more of this.
If the interest rates are negative, the BoE will charge for any deposits on behalf of the banks. It encourages banks to lend to businesses without depositing money.
Since interest rates are already low, it is not clear to what extent negative rates will help boost new activity.
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Such action increases the risk for banks, which make money by charging interest on loans and generally suffer from lower rates.
Just as banks are now facing greater losses due to the epidemic, rates are also being cut, which has damaged the ability of many of their customers to repay loans.
Sir Dave said the potential impact on Bank of England banks needs to be further considered before dealing with negative rates.
“If you get negative rates on the toolbox, depending on my duties at the bank, I think the duty will be adhered to, then you should enforce the negative rates as well as explore the operational issues in more detail,” said Sir Dave Boe’s Member of the Monetary Policy Committee (MPC) and Deputy for Markets and Banking. The governor told the SPE.
“If you do not want to be in a position where you think you can use them, then tell us at some point in the future, in fact the committee has decided that we should use them, then you go back and look in the toolbox, and find that you actually can not use them for operational reasons.”
BBC News Business Reporter Xu Ping Chan Analysis
As interest rates are already close to zero, the Bank of England is exploring creative ways to keep the economy afloat.
Only a handful of central banks have joined the club of negative interest rates, including Japan, Sweden, Switzerland and the European Central Bank.
Countries like Switzerland have implemented negative rates, trying to stop investors from plowing money into the country, which is increasing its currency strength.
But for the UK blueprint is not as easy as copy and paste.
Savers who do not charge to put their money in the bank will take their business elsewhere. Banks in the UK are also facing loan losses as borrowers struggle to repay. Squeezing out their profits puts them in serious trouble.
However, negative rates are not around the corner. Before deciding whether to open the toolbox to use them, the Bank of England is using the next three months to see how it can be implemented.
Sir Dave said the MPC was “not about using” [negative interest rates] Imminent “, and” takes time “to interact with banks.
“We are pursuing a quantitative easing program – no one is currently voting for negative rates,” Sir Dave said.
“I am less committed to effectiveness [for interest rates] Still at 0.1%, the bank rate is here right now. It is useful to emphasize.
Sir Dave is one of the few members of the bank’s nine – member monetary policy committee that has shared his views on negative interest rates since the bank said it was considering such a move last month.
Silwana Tenrero, an external member of the committee, contradicted his warning to recent comments, as evidenced by evidence from other European countries and Japan to the Sunday Telegraph. Suggested that negative interest rates have been successful in reducing borrowing costs.
Despite the coronavirus epidemic, evidence has shown that banks face additional pressure on their financial situation.