Interest rates could go negative, says Bank

THE Bank of England has paved the way to cut interest rates into negative territory as it seeks to restore the economy to health in the wake of the Covid-19 outbreak.

Minutes of the latest meeting of the Monetary Policy Committee (MPC) revealed members have been briefed on plans ‘to explore how a negative Bank rate could be implemented effectively’.

The pound slid as much as 0.9pc against the dollar and 0.6pc against the euro following the release of the documents, which were the strongest sign yet that the Bank may take interest rates below 0pc for the first time in history.

But sterling recovered as the afternoon drew on, steadying just below $1.30 and €1.10. Negative interest rates would squeeze Britain’s long-suffering savers even further, as they would earn even less on their cash in the bank and could even have to pay to keep it there.

But it would be a relief for struggling borrowers, who could see interest payments on their debt fall.

The MPC, which is chaired by governor Andrew Bailey, said it had been ‘briefed on the Bank of England’s plans to explore how a negative Bank rate could be implemented effectively, should the outlook for inflation and output warrant it at some point’.

It noted that the economy had been recovering faster than expected from its coronavirus-induced recession, which was the second-worst in the G7 ahead of Italy.

But it sounded a note of caution over this data, adding it was ‘unclear how informative they were about how the economy would perform further out’.

The Bank left its monetary policy unchanged yesterday, with interest rates at the record low of 0.1pc as it tries to encourage spending rather than saving.

It did not announce any increase to its bond-buying programme – also known as quantitative easing – which is another way of injecting money into the economy.

But George Buckley, chief UK economist at Japanese financial holding company Nomura, said: ‘The mere fact that the Bank is talking about negative rates so explicitly makes any easing in November more likely, and should the Bank not be in a position to lower rates at that point, another £100bn of quantitative easing being added to the mix seems the most likely response.’

The Bank is aiming to get inflation back up to its 2pc target, but data earlier this week showed inflation was only at 0.2pc in August.