Negative interest rates suggested by Bank of England

In an effort to try and pump more cash back into the British economy, the Bank of England has raised a novel concept; negative interest rates. This is part of a bid to borrowing going across Britain.

Governor of Bank of England, Mervyn King
Mervyn King

Paul Tucker, the Bank of England deputy governor for financial stability, said it was one of the ideas he had been considering to try to push cash out in the real economy. This is a problem shared by Britain as well as a number of economies in the wider Euro area.

Speaking to the Treasury Select Committee (TSC), Mr Tucker said: “I hope we will think about whether there are constraints to setting negative interest rates.

“This is an idea I have raised. This would be an extraordinary thing to do and it needs to be thought through very carefully.”

Negative interest rates are a rare phenomenon although not entirely alien. Several central banks have experimented with negative interest rates in recent years – most notably Denmark and Sweden.

The theory behind negative rates would be to try to push commercial banks to leave less cash at the central bank and instead to lend it out to businesses around the country.

At present, the central bank pays an interest rate of 0.5% on deposits UK banks leave in reserve at the BoE.

By reversing this and say if the rate of interest were -0.5%, this would mean the commercial banks would have to pay the Bank of England a 0.5% (per year) for deposits left with it.

So far, the concept of negative interest rates may not be gaining the traction required to make it happen as it has been rejected by the Bank of England governor, Mervyn King. However, simply raising the concept in such a public forum underscores just how seriously the Bank of England is taking the ongoing lack of general availability of credit in the wider economy. It will be interesting if the concept makes its way into the agenda of the ECB.

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