Issue of the week: less than zero?
Once regarded as “unthinkable”, sub-zero interest rates could now be a real possibility in Britain
Safety deposit boxes are apparently doing a roaring trade among the wealthier denizens of Switzerland, said Tom Rees in The Sunday Telegraph. Blame negative interest rates. Ever since the Swiss central bank slashed rates to below zero in 2015 (a move intended then as a temporary measure), Switzerland’s richest have been doing the equivalent of “stuffing cash under the mattress”, rather than paying the likes of Credit Suisse and UBS for the privilege of holding their cash. “Britain’s savers should take note.” The “topsy-turvy world of negative rates” may be heading our way. Last week, Bank of England governor Andrew Bailey hinted that UK interest rates, already languishing at an historic low of just 0.1%, could be cut below zero to kick-start the economy, telling MPs it would be “foolish” to rule it out.
Only a couple of weeks ago, Bailey was adamant the Bank wouldn’t resort to going negative, said Lucy White in the Daily Mail. The pandemic has changed all that. The BoE’s central remit is to keep inflation as close as possible to its 2% target, but during lockdown it has “almost halved” – from 1.5% in March to 0.9% in April. Hence, the growing pressure on policymakers to do the unthinkable to prevent deflation. Yet, this reversal of the norms – if it happens – could come at a cost. Some economists fear the cure of negative rates would be worse than the disease, if it affects liquidity in the banking system and impacts on banks’ profitability. All the more so if, deprived of deposits, “high street lenders then lack the reserves they need to lend” – essentially “defeating the object of the exercise”, said The Observer. Most City economists believe the “unintended consequences” in an economy like the UK’s make negative interest rates a “last resort”. It’s a measure of “the magnitude of the current downturn” that Bailey is even considering “pulling the lever”.
Despite all the scare stories, the experience of negative rates in other countries hasn’t been so bad, said Chris Giles in the FT. Both the Bank of Japan and the European Central Bank went negative before the Covid-19 crisis and the ECB’s “latest assessment of negative rates has been broadly positive”, in terms of encouraging investment and bank lending. The real question, though, is whether straying into negative territory is worth the hassle, said The Economist. The regulatory changes “needed to achieve deeply negative rates at acceptable risk” may prove “politically contentious”. And far more potent weapons – such as fiscal stimulus and central-bank asset purchases – haven’t yet hit their limitations. Bailey might well conclude that there’s “little reason” to “venture too far into sub-zero terrain” – yet.