A second Bank Of England official has claimed that negative interest rates could be beneficial to the UK economy in the fight against the effects of the coronavirus pandemic.
Professor Jonathan Haskell is an external member of the Bank’s Monetary Policy Committee (MPC) which is responsible for setting the country’s base interest rate.
In warning of the current risks to the economy from the effects of Covid-19 he said there was ‘positive evidence’ that negative interest rates could be a useful remedy.
The current interest rate is at the record low of 0.1% and it is understood that the MPC is reviewing whether a negative rate could be an effective policy.
It has never been tried in Britain before, but a number of countries, including Japan and Sweden, have tried it.
Speaking to the Barclays Global Inflation Conference online he said: “There is some very, very good work there which suggests some positive evidence that negative rates have benefited the economy.
“That said, the effectiveness is probably going to be contingent on the structure of the financial system and the position where we are in the cycle, so we have to look at that very carefully.”
His comments echoed those of his MPC colleague Silvana Tenreyro who also claimed the bank had found some ‘encouraging evidence’ during their investigation.
She revealed that cutting the rate below zero in Japan and some countries in the eurozone had succeeded in lowering the borrowing costs for business without making it unprofitable for banks to lend.
She said: “The evidence has been encouraging. Banks adapted well — their profitability increased with negative rates largely because impairments and loss provisions have decreased with the boost to activity and the increase in asset prices.”
She added that cuts in interest rates below zero were passed on successfully to customers, leading to reductions in interest rates charged to borrowers.
But new Bank governor Andrew Bailey has made it plain that a shift is not imminent.
Speaking on a British Chambers Of Commerce webinar he admitted that the possibility was being discussed, but there are no immediate plans to introduce it.
He said: “Yes it’s in the tool bag, but that does not imply anything about the probability of us using negative interest rates at the moment.”
He added: “So it is no surprise we’re going to do this work. It’s going to take time because there’s quite a lot of technical complexity.”