Bank of England could set negative interest rate
INTEREST rates may need to be slashed below zero to stave off another economic downturn, a senior Bank of England official warned yesterday.
Such a move would mean that rather than earning on money left in the bank, savers would instead be charged – acting as a tax on savings.
Chief economist Andy Haldane said Britain could require ‘ radical’ action in order to keep the recovery on track, including further cuts in interest rates and even, in theory, the abolition of cash.
His comments put him at odds with Bank of England Governor Mark Carney, who this week hinted rates could rise in the coming months.
The clash between the Governor and one of his lieutenants muddies the outlook for interest rates at a crucial time for borrowers, savers and businesses.
Rates have been frozen at a historic low of 0.5 per cent since March 2009, resulting in ultra-cheap mortgages. But the move has hammered savers, who have suffered more than six years of paltry returns.
Central banks traditionally cut interest rates to discourage saving and encourage borrowing and spending – so boosting the economy during a slowdown.
High street banks are persuaded to lend more because they are charged when they lodge cash at the central bank. But any attempt to bring in negative rates could see savers withdraw their money from banks and hoard it under the mattress to avoid charges.
In a speech to business leaders in Northern Ireland yesterday, Mr Haldane – who has been tipped as a potential successor to Mr Carney – said that one way to stop hoarding would be to replace cash with a state-issued digital currency that would be subject to negative interest rates. By tempting people to spend this would, in theory, boost the economy.
Negative interest rates would not mean those with mortgages would get paid by their bank. Although tracker mortgages f ollow the Bank’s rate, most have a minimum level they will track to.
Mr Carney has been eager to predict higher rates as the economy
‘Squarely and significantly’
recovers and wages rise. Appearing before the Treasury select committee this week, he said ‘the next move in interest rates is likely to be up’ to ensure inflation does not rise above the two per cent target. He added that ‘it may be appropriate’ to raise rates ‘around the turn of this year’ if the economy and wages continue to recover.
But Mr Haldane yesterday told Portadown Chamber of Commerce: ‘The balance of risks to UK growth and to UK inflation is skewed squarely and significantly to the downside. Against that backdrop, the case for raising UK interest rates in the current environment is, f or me, s ome way f r om being made.’
He added there ‘could be a need’ to cut interest rates rather than raise them ‘as the next step to support UK growth and return infla- tion to target’. But Howard Archer, chief UK economist at research group IHS Global Insight, said Mr Haldane’s stance ‘looks isolated’, adding: ‘The question still seems very much one of when will the Bank of England start to inch interest rates up.’
Britain’s productivity levels have fallen to the lowest below other G7 countries since records began more than two decades ago.
Figures for 2014 show the UK’s output per hour worked and output per worker were both 20 percentage points below the average for advanced economies last year, said the Office for National Statistics.