The Daily Telegraph - Business - - Front Page - By Tim Wal­lace

Back in the mists of time, there was a Bank of Eng­land Gov­er­nor who maintained a firm stance against tak­ing in­ter­est rates be­low zero. “As things stand, I do not re­gard nega­tive of­fi­cial in­ter­est rates as a plau­si­ble tool,” he said. That dis­tant era was March, the Gov­er­nor was An­drew Bai­ley, and the world has changed since.

Now the Bank is re­view­ing its “ef­fec­tive lower bound” (ELB), the point be­low which rates can­not use­fully fall, and we could get an up­date to­mor­row. That ELB stands at just 0.1pc, so any change could open the door to nega­tive rates.

Pro­po­nents say nega­tive rates could help to get the econ­omy back on its feet. But do they work?

Five ma­jor cen­tral banks have gone sub-zero so far, and the ev­i­dence in­di­cates very mixed re­sults.

Ja­pan took short-term rates to mi­nus 0.1pc in 2016 and seeks to keep long-term mar­ket rates down too.

The idea is to pro­mote bor­row­ing, spend­ing and in­vest­ment. It has cer­tainly boosted as­set prices. In the real econ­omy in­fla­tion re­mains well short of the 2pc tar­get, though it is no longer near de­fla­tion. Growth has not ac­cel­er­ated since the pol­icy be­gan.

“Ja­pan has run fis­cal deficits for decades now, all funded at low or re­cently nega­tive in­ter­est rates,” say an­a­lysts at Citi. “Rather than es­cap­ing from sec­u­lar stag­na­tion, they seem more mired in it than ever.”

The Euro­pean Cen­tral Bank took its de­posit rate nega­tive in 2014, ini­tially to mi­nus 0.1pc and now to mi­nus 0.5pc. The ECB says it lifted the sup­ply of credit. Along with QE it has helped in­debted states stay on top of fi­nances.

But its ex­pe­ri­ence also shows the dif­fi­cul­ties of us­ing nega­tive rates, which hit banks’ mar­gins, po­ten­tially im­ped­ing lend­ing in­stead of rais­ing it. As a re­sult the ECB “tiers” the nega­tive rate, only ap­ply­ing to a por­tion of banks’ de­posits. Yet this erodes a main in­cen­tive to lend more. When Swe­den’s Riks­bank took its de­posit rate nega­tive in 2014, it ex­pected in­fla­tion to re­turn to tar­get in one year. In­stead it took al­most five to get close and the rate was re­turned to zero last De­cem­ber.

It feared the per­cep­tion of per­ma­nently nega­tive rates would lead to nega­tive rates on sav­ings.

“The mi­nus world has not had a full im­pact on house­holds, as the de­posit rates they meet have not passed zero,” said deputy gov­er­nor Henry Ohls­son.

“This has, on the one hand, meant that the im­pact of mon­e­tary pol­icy has been less than in the plus world.

“But on the other hand, it has prob­a­bly also meant that house­holds have not been as up­set as they would oth­er­wise have been.”

In Den­mark, how­ever, house­buy­ers can re­pay less on mort­gages than they bor­rowed. Some sav­ings ac­counts charge a sub-zero rate to those with more than about £85,000. Yet sav­ings lev­els have not fallen, sug­gest­ing cus­tomers may hoard cash when cen­tral banks take rad­i­cal steps.

With a rate of mi­nus 0.75pc, passed on to de­pos­i­tors with big bal­ances plus in­sti­tu­tions’ de­posits, odd things hap­pened in Switzer­land.

Cus­tomers have sought out safety de­posit boxes in­stead of sav­ings ac­counts, pay­ing a fee to stash 1,000 franc (£825) notes in a locker in­stead of in­cur­ring nega­tive rates.

It messes with cash flow plans, too. The can­ton of Zug used to of­fer a dis­count for early pay­ment of taxes. In 2016 it can­celled the scheme and asked for pay­ments to come in later in­stead to avoid in­cur­ring nega­tive rate losses.

For­mer Bank of Eng­land pol­i­cy­maker Charles Good­hart warns that keep­ing rates low for the longterm risks build­ing up debts, cre­at­ing “zom­bie” firms, de­liv­er­ing lower eco­nomic growth through the poor al­lo­ca­tion of credit, and weaker banks through the ero­sion of their prof­its.

Sven Jari Stehn, at Gold­man Sachs, thinks the Bank will lower its ELB sim­ply to have the op­tion on the ta­ble – thus pin­ning down mar­ket rates.

That would let Bai­ley re­in­force low rates with­out hav­ing to risk the con­se­quences of go­ing through the look­ing glass into sub-zero con­di­tions.

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