InvestmentsMar 4 2013

Economists reject negative interest rate talk

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Paul Tucker’s suggestion that the Bank of England may consider setting a negative interest rate was met with criticism that it would penalise households more than banks and not benefit the economy.

Mr Tucker, the Bank of England’s deputy governor, said to the Treasury Select Committee last week that introducing negative interest rates was a possibility, although it “would be an extraordinary thing to do and it needs to be thought through very carefully.”

The Bank’s base lending rate is the amount that other banks pay to borrow from it as well as the amount it pays on its reserves.

The rate is currently at the historically low 0.5 per cent, and theoretically if the rate was to fall into negatives it would penalise banks for holding reserves rather than lending.

The comments came as the UK’s fourth-quarter GDP contraction of 0.3 per cent was confirmed by the Office for National Statistics.

Samuel Tombs, UK economist at Capital Economics, said a negative rate could do more harm than good.

“This policy could have an adverse affect on the economy,” he said. “Banks may try to increase profits by lending more, as is intended, or they may charge more on existing loans.”

David Tinsley, UK economist at BNP Paribas, said he was surprised by Mr Tucker’s comments, as negative interest rates could only have limited effectiveness.

“The UK needs to boost corporate lending rates to smaller and medium companies and negative interest rates will not ensure that will occur,” he said.

“There is a limit to how much this policy would feed through to the real economy because bank customers would just withdraw their money if they started being charged negative interest rates.”

Simon Ward, chief economist at Henderson Global Investors, said that the proposal was more about the Bank “wanting to show people they were not out of ammunition” and added it would “not be a good idea”.