Bank of England policymakers consider negative interest rates
Deputy Governor Paul Tucker has said the "extraordinary" idea has been floated.
The Deputy Governor of the Bank of England, Paul Tucker, has said the central bank has considered introducing negative interest rates to help get the economy moving again.
Appearing before the Treasury Select Committee, he said: "This would be an extraordinary thing to do and it needs to be thought through carefully."
Lowering the Bank of England base rate to negative territory would mean banks would be charged for holding their funds at the central bank. At the moment, they earn interest on money deposited there.
The hope would be that this would force banks to start lending their reserves more widely.
If such a move was made, it would almost certainly reduce variable mortgage interest rates, as they are in part linked to the Bank of England rate, and potentially cut personal loan rates too.
But on the flipside it would also lead to further cuts in savings interest rates, which are already low, mainly due to the Funding For Lending scheme. This offers banks and building societies the opportunity to borrow money from the central bank at low interest rates.
What do you think of the idea? Vote in our poll below and have your say in the Comments section.
Negative interest rates were not the only idea the Bank of England policymakers discussed at their last Monetary Policy Committee meeting at the beginning of this month. They also voted on the quantitative easing programme, which pumps Bank money into the economy by buying up Government bonds or gilts. Six members voted in favour of not making further purchases, while three voted for a further £25 billion to be spent on asset purchasing.
The committee also considered buying assets other than gilts, and a possible extension to the Funding For Lending scheme.
More on the economy
Why base rate hasn't been cut to 0%
What the UK credit rating downgrade means for our money
Gilt market won't crash in 2013
Our mid-term review of the Government
Comments
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Or any "willfully unknowns" (look up "New Labour", "It's a new paradigm").
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@Bank Manager: The mechanics appear sound - spend the reserves, buckle up, and, oh, pray there are no "unknown unknowns" around the corner.
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[i]The Bank Manager said ...whilst the Bank's themselves can only generate the funds to lend, by way of paying decent interest rates, to attract savers. [/i] Well said, that man. I am miffed by the fact that most personal loans are in the region of 10% APR while a savings account can still be below 1%. That is one mighty gulf between saving and borrowing. It is no wonder that people are diverting money earmarked for saving to other avenues. If their money is ONLY working for the banks, and not them, then what is the motivation for even lending money (commonly called saving) to the banks? I think the term is known as greed, and many organisations are now practising this phenomenon. The BIG FOUR supermarkets are known to pay farmers little, then charging a lot, for produce, and now the banks are doing the same, giving little for savings but selling them on as loans for a sizeable chunk. I should also point out that my bonus is linked to company profit, so even if I do well, if the company is suffering, so does my bonus. There is no excuse to pay mega bonuses when the overall condition of a bank is suspect. The idea of a bonus scheme is to reward everyone within the institution for helping to promote a viable business model that is profitable, and not a loss or a drain.
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14 May 2013