Will interest rates go below zero?

The Bank of England has been looking into the idea of setting negative interest rates. Could it happen?

Whither negative interest rates? The City is watching Threadneedle Street carefully for signs about whether negative interest rates could be in the pipeline, reports Gurpreet Narwan in The Times. The Bank launched a review of the idea last summer, studying how they have worked in places such as Japan and Sweden. It has also been consulting with commercial banks to establish whether the policy is “operationally feasible”.

Lenders, who would lose out from lower rates, have highlighted the operational difficulties. The policy could prove counterproductive as banks move to protect their margins and rein in lending to the real economy, Mike Regnier of Yorkshire Building Society told The Guardian. Unprepared bank IT systems could also face a “Y2K-type” bug if they tried to handle negative rates.

The early indications are that the consultation has not gone well, says Samuel Tombs of Pantheon Macroeconomics. Governor Andrew Bailey has taken a more sceptical tone on negative rates, judging by his recent comments that the policy has “lots of issues” and that the “transmission” mechanism to the real economy is unclear. 

The Bank won’t “shut the door entirely” on negative rates (it likes to keep something in reserve just in case), but it looks less inclined to use them. Expect lots more “creative ambiguity” from the central bank. 

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