Is the UK heading for negative interest rates?

Sweden abandoned negative rates last year

(Image credit: © RooM the Agency / Alamy)

published 2 October 2020

The Bank of England’s governor, Andrew Bailey, has spoken of negative interest rates as being “in the tool bag”. Monetary Policy Committee (MPC) member Silvana Tenreyro says that the evidence for negative interest rates is “encouraging”. Yet Dave Ramsden, another MPC member, this week cast doubt on the idea that rates could fall below 0.1% without the policy backfiring.

Negative rates are supposed to stimulate bank lending by charging banks fees for any cash they leave stashed in their accounts at the Bank of England, says Ruth Sunderland in the Daily Mail. It remains an open question whether the banks would dare pass along negative rates to their own customers. Sweden’s central bank was the first country to experiment with a negative interest rate in 2009 when it began to charge banks interest on overnight deposits. Its headline interest rate went negative in 2015. The European Central Bank cut its deposit rate to -0.1% in 2014, followed by Switzerland the following year. The Bank of Japan cut its key rate to -0.1% in 2016. Negative rates have an underwhelming record as a stimulus measure. They have done little to remedy chronically weak inflation in the eurozone and Japan, says Brian Blackstone in The Wall Street Journal. They seem to have little effect on the amount that people choose to save and spend. Negative rates have also meant a miserable decade for European bank profitability.

There is evidence that negative rates reduce lending costs, but diminishing returns set in quickly. The debatable rewards of the policy should be set against the significant downside risks: inflated asset bubbles and damage to banks and pension funds, says James Mackintosh in The Wall Street Journal. Note that Sweden last year ended its negative interest-rate policy.