Is the UK heading for negative interest rates?

The hints that negative interest rates are heading for Britain are now coming thick and fast.

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.

Recommended

The after effects of the gas-price shock
Economy

The after effects of the gas-price shock

In the wake of the recent spike in the natural gas price, we can expect slower growth, an industrial recession – and a newly assertive Russia, says Ma…
17 Oct 2021
The charts that matter: bond yields slip while bitcoin tops $60,000
Economy

The charts that matter: bond yields slip while bitcoin tops $60,000

Cryptocurrency bitcoin soared to over $60,000 this week, while government bond yields fell back. Here’s how that has affected the charts that matter m…
16 Oct 2021
Whistleblower allegations – where now for Facebook?
Tech stocks

Whistleblower allegations – where now for Facebook?

The social-media giant has come in for some fierce criticism following revelations from a former employee. Just how much damage has been done?
16 Oct 2021
Inflation, energy crisis, strikes – have we gone back to the 1970s?
Investment strategy

Inflation, energy crisis, strikes – have we gone back to the 1970s?

Merryn and John talk about rising prices, productivity and the state of the labour market, plus are bond investors really the adults in the room, and …
15 Oct 2021

Most Popular

Why the world’s most important economic data release has unnerved markets
US Economy

Why the world’s most important economic data release has unnerved markets

The US added only 194,000 jobs in September, far shorter than the 500,000 that were expected. John Stepek explains why markets didn't react as they no…
11 Oct 2021
How to invest in SMRs – the future of green energy
Energy

How to invest in SMRs – the future of green energy

The UK’s electricity supply needs to be more robust for days when the wind doesn’t blow. We need nuclear power, says Dominic Frisby. And the future of…
6 Oct 2021
Inflation is still one of the biggest threats to your personal finances
Investment strategy

Inflation is still one of the biggest threats to your personal finances

Central bankers and economists insist inflation will be gone by next year. We're not so sure, says Merryn Somerset Webb. So if you haven’t started to …
1 Oct 2021