Investments  

Carney sceptical on negative interest rates

Carney sceptical on negative interest rates

Bank of England governor Mark Carney has said negative interest rates are likely to have limited effects.

In a speech at a meeting of the G20 in Shanghai, Mr Carney said there was “no free lunch” when it comes to monetary policy.

He said: “It is critical that stimulus measures are structured to boost domestic demand, particularly from sectors of the economy with healthy balance sheets. There are limits to the extent to which negative rates can achieve this.

Article continues after advert

“For example, banks might not pass negative policy rates fully through to their retail customers, shutting off the cash flow and credit channels and thereby limiting the boost to domestic demand.

“That is associated with a commonly expressed concern that negative rates reduce banks’ profitability.”

He also warned against countries taking a “beggar-thyself via beggar-thy-neighbour” approach to monetary policy by reducing rates in to weaken their currency.

Mr Carney said: “When negative rates are implemented in ways that insulate retail customers, shutting off the cash flow and other channels that mainly affect domestic demand, while allowing wholesale rates to adjust, their main effect is through the exchange rate channel.

“From an individual country’s perspective this might be an attractive route to boost activity.

“But for the world as a whole, this export of excess saving and transfer of demand weakness elsewhere is ultimately a zero sum game.”

Last month the Bank of Japan surprised markets when it became the latest central bank to introduce negative interest rates.

Denmark, Switzerland and Sweden are among the countries which also have negative interest rates.

Mr Carney also told the conference that while the world risks becoming trapped in a “low growth, low inflation, low interest rate equilibrium” central banks still have ways of countering this.

Earlier this week Mr Carney told the Treasury Select Committee that interest rates could be lowered from their record 0.5 per cent low.

Despite recent market turbulence, Mr Carney added, “this is not 2008”.

He said: “The largest cross-border banks are considerably stronger than during prior episodes of market stress.”