Interest rates could go down further according to the Bank of England governor but he has stressed he has “no interest” in going below zero.
Speaking to the Treasury select committee Mark Carney said the Bank could go below 0.5 per cent towards zero.
He said: “It is now our judgment that we, if necessary, could lower the bank rate.
“There have been some estimates of the storage cost of cash in jurisdictions that have very negative interest rates and it tends to range in the 75 to 200 basis points range if you get down to minus 2 per cent.
“I will just re-emphasise we have absolutely no intention, no interest, in doing that.
“We take very seriously the potential counter productive impact on the building society sector particularly but the financial sector as a whole.”
Mr Carney said that in jurisdictions where interest rates have gone negative there have been side effects such as mortgage rates going up in Switzerland.
He said: “If we were in that situation where we needed to provide additional stimulus the committee would look at a range of options and judge what is likely to be most effective in achieving the inflation target.
“We do have options around quantitative easing. We would be very conscious if we ever extended beyond gilts. The reason for doing that would be because of market disfunctioning.
“If we purchased other assets it would have to be designed in my view in an absolutely neutral way so we were not making distributional decisions across sections of the economy because that is a job for the government.
“Over the forecast horizon interest rates are more likely than not to increase.
“Of course if risks were to materialise, if the global situation were to intensify to the downside that would have implications for the path of policy.”
He was joined at the hearing by Gertjan Vlieghe, a recently appointed member of the Monetary Policy Committee.
He said: “Ultimately the judge of whether this is successful or not is whether inflation returns to target. That is our mandate and the mandate of most other central banks.
“When you lower interest rates and you go the other side of zero there are some fairly straight forward effects, which are unambiguously positive for borrowers and holders of assets.
“You lower money market rates, which gets transmitted to the rest of the yield curve, which then gets transmitted to equity markets as people discount profits at lower interest rates.
“In addition however you are putting a lot of pressure on the profitablity of banks and it is a very difficult question to know how to weigh those two because one of them is a stimulus to the economy and the other obviously isn’t.”
He said it would be very difficult to know how banks would respond to negative interest rates, which would depend on the precise institutional set up of the bank.
