Negative interest rates idea floated by Bank's Paul Tucker

Paul Tucker told MPs he had suggested negative interest rates in an attempt to boost the economy

Bank of England deputy governor Paul Tucker has said negative interest rates should be considered.

A negative interest rate would mean the central bank charges banks to hold their money and could encourage them to lend out more of their funds.

Speaking to MPs on the Treasury Committee, Mr Tucker said: "This would be an extraordinary thing to do and it needs to be thought through carefully."

He said it was one of a number of ideas that he had put up for consideration.

"I hope we will think about whether there are constraints to setting negative interest rates," Mr Tucker told MPs.

Any discussion of negative rates would have to take into account the likely detrimental impact on savers, who have already seen the income from their savings fall since the financial crisis.

With interest rates at a record low, there is little scope for central banks to use conventional means to stimulate the UK's weak economy, which has dipped in and out of recession since the 2008 financial crisis.

Start Quote

Some of the proposals we heard today, such as moving to negative interest rates, are radical; others are not. They all warrant careful consideration”

End Quote Andrew Tyrie MP Chairman, Treasury Select Committee

The Bank has resorted to quantitative easing (QE), pumping billions into the economy.

Minutes of the last meeting of the Bank's policy setting committee showed that the governor, Sir Mervyn King, was outvoted in calling to expand QE from its current level of £375bn.

During that meeting other policy measures discussed included buying assets other than government bonds. It also considered reducing the Bank rate, which is currently 0.5%, and is the rate which directly influences mortgage and loan rates.

More QE?

In addition, the committee looked at reducing the marginal rate of interest on bank reserves held at the Bank to encourage them to lend more. When negative interest rates were introduced in Denmark, it was this rate which was cut below zero.

The Bank of England minutes showed that the committee, "had noted drawbacks with each of these options in the past ; those drawbacks remained".

Analysis

Negative interest rates? Sounds a bizarre notion and the Bank of England deputy governor Paul Tucker acknowledged it would be an "extraordinary" move.

But it is clearly in the Bank's thinking even if not adopted at this stage. The Danish central bank has already gone down this route. The theory is that commercial banks are depositing too much cash in the vaults of the Bank of England.

To encourage them to withdraw the money and lend it elsewhere they would not be paid interest and instead would be charged a fee (negative interest) for holding cash at the Bank of England.

There would not be negative interest on High Street deposits but banks would almost certainly react by cutting savings rates and raising current account charges. The big risk is that any gain in lending by banks would be matched by losses for savers and damage to banks' profits.

"The committee would nevertheless continue to examine all of the policies potentially available to it."

In his evidence to MPs, Mr Tucker also suggested "possible extensions" to the Funding for Lending scheme that he termed "quite significant, in terms of lending to non-banks and via non-banks".

In its first phase, the Bank's Funding for Lending scheme offers up to £60bn of cheap funds to banks and building societies if they then lend the money to individuals and businesses.

Mr Tucker also suggested that QE - whose merits have been much debated - may soon give a lift to the economy.

"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," he said, referring to the eurozone debt crisis and the US battles over the "fiscal cliff".

But he added: "I remain open to doing more QE, depending on the outlook for demand and inflation. Nobody on the committee thinks that QE has reached the end of the road and that it is not a useful instrument anymore.

"We stand prepared to do more, if we judge that necessary,"

Untested ideas

Chairman of the Treasury Select Committee, Andrew Tyrie said it had long been concerned about the shortage of lending to the SME sector that was inhibiting economic growth in the UK.

"The MPC is right to be looking at additional tools, or changes to existing tools, that could help," he said.

"Some of the proposals we heard today, such as moving to negative interest rates, are radical; others are not. They all warrant careful consideration," he said in a statement after the hearing.

In 2009, the Swedish central bank, the Riksbank, surprised many when it set a rate of -0.25%. The move below zero for the first time was seen as largely symbolic.

That was on the deposit rate, the rate put on money left by commercial banks at the central bank, which it normally earns interest on.

Banks were, in effect, being charged for keeping money at the central bank rather than lending it out to consumers and businesses to boost consumer spending and growth.

Denmark cut its deposit rate below zero in July last year, and in December, the Swiss bank Credit Suisse imposed negative rates on bank deposits to tame demand for the Swiss franc.

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