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Bank of England policymakers consider negative interest rates

Simon Ward
by Lovemoney Staff Simon Ward on 26 February 2013  |  Comments 26 comments

Deputy Governor Paul Tucker has said the "extraordinary" idea has been floated.

Bank of England policymakers consider negative interest rates

The Deputy Governor of the Bank of England, Paul Tucker, has said the central bank has considered introducing negative interest rates to help get the economy moving again.

Appearing before the Treasury Select Committee, he said: "This would be an extraordinary thing to do and it needs to be thought through carefully."

Lowering the Bank of England base rate to negative territory would mean banks would be charged for holding their funds at the central bank. At the moment, they earn interest on money deposited there.

The hope would be that this would force banks to start lending their reserves more widely.

If such a move was made, it would almost certainly reduce variable mortgage interest rates, as they are in part linked to the Bank of England rate, and potentially cut personal loan rates too.

But on the flipside it would also lead to further cuts in savings interest rates, which are already low, mainly due to the Funding For Lending scheme. This offers banks and building societies the opportunity to borrow money from the central bank at low interest rates.

What do you think of the idea? Vote in our poll below and have your say in the Comments section.

Negative interest rates were not the only idea the Bank of England policymakers discussed at their last Monetary Policy Committee meeting at the beginning of this month. They also voted on the quantitative easing programme, which pumps Bank money into the economy by buying up Government bonds or gilts. Six members voted in favour of not making further purchases, while three voted for a further £25 billion to be spent on asset purchasing.

The committee also considered buying assets other than gilts, and a possible extension to the Funding For Lending scheme.

More on the economy

Why base rate hasn't been cut to 0%

What the UK credit rating downgrade means for our money

Gilt market won't crash in 2013

Our mid-term review of the Government

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Comments (26)

  • BobbyW
    Love rating 10
    BobbyW said

    Is this not a opportuntity for irresponsible lending again then - Force the banks to lend their own money...

    I am all for stimulating the market but forcing them to lend when they may not want to may be a bit bullish is it not?

    Report on 26 February 2013  |  Love thisLove  1 love
  • r
    Love rating 72
    r said

    If this happens, it will be the consumer who pays. Banks will onpass the rate to their customers in the form of higher account charges - maybe even paying us a negative return . . . that would be novel !

    r.

    Report on 26 February 2013  |  Love thisLove  2 loves
  • maddogmack
    Love rating 3
    maddogmack said

    I must admit, I would be prepared to borrow money from the Bank of England if they were to pay me to do so

    Report on 26 February 2013  |  Love thisLove  0 loves
  • css
    Love rating 20
    css said

    I think you get these sort of ideas when you eat Donkey Meat.

    Report on 26 February 2013  |  Love thisLove  2 loves
  • AlanThomas
    Love rating 24
    AlanThomas said

    The Japanese banks did something like this in the 90s...peaple with savings had to pay the bank 3% to look after there money...are we heading for a lost decade as the japanese had in the 90s?

    Report on 26 February 2013  |  Love thisLove  2 loves
  • nickpike
    Love rating 277
    nickpike said

    They are not allowing the free market to operate. It will end in tears.

    We already have negative rates. Inflation is higher than interest rates. I'm seriously considering buying gold. All savers should withdraw their money. That would knacker the banks and serve them right.

    Report on 26 February 2013  |  Love thisLove  0 loves
  • Mike10613
    Love rating 600
    Mike10613 said

    They sound desperate. They'll be putting a PayPal donate button on their website next... :)

    Report on 26 February 2013  |  Love thisLove  0 loves
  • trekdigit
    Love rating 3
    trekdigit said

    They should be put the interest rate up, this would bring down inflation, which would help everyone. It would encourage lending to businesses because they would be getting a better rate of return. Savers also would get a better return, hopefully above inflation. And from the better rate that saver would get the government would get more tax! Everyone's a winner.

    Report on 26 February 2013  |  Love thisLove  2 loves
  • Henry-GBG
    Love rating 49
    Henry-GBG said

    "get the economy moving again"

    Why is it not moving? Do they have a realistic model of how an economy actually works? Because if they do not, then what hope is there that any of their policies will do what they are intended to do?

    Report on 26 February 2013  |  Love thisLove  2 loves
  • MK22
    Love rating 149
    MK22 said

    Nobody has a realistic model of how an economy works, that would require them to understand how an economy works and we know they don't do that!

    Report on 26 February 2013  |  Love thisLove  0 loves
  • TBoneBod
    Love rating 12
    TBoneBod said

    If they're really intent on getting the economy moving. Why did they allow the rate of VAT to be increased by almost 16%? Yes, sixteen per cent! It is two and a half percentage points - but almost 16%; 17.5 + 16% try it.... We have fuel that is heavily taxed - and then there's VAT on top of that. Yes, a tax on a tax... And then there's stamp duty, that isn't incremental, like income tax, (which was introduced in 1799, as a means of paying for the war against the French forces under Napoleon - as a temporary measure), Stamp duty for a property that sells at £320,000 equates to: £9600. If it was incremental, it would be: £3350. I appreciate that this would reduce revenue, on the face of it. But how many house sell for "just over " any of the thresholds? And it's a big sting to anyone buying a house for £130,000 - £1300, instead of: nothing if the house sold for just £5000 less. Why don't they stop trying to over-complicate things, and just make the existing system more fair for those of us who really need it, whilst maintaining an income through revenue?

    Report on 26 February 2013  |  Love thisLove  2 loves
  • NatFeerick
    Love rating 16
    NatFeerick said

    Newsflash: most taxes were imposed as a 'temporary measure' - the fuel escalator was meant to be temporary and look where we are with that now!

    The government is behaving like a consumer in debt - grasping at emergency sticking plasters to buy them a bit more time. But we all know where that ends.

    How long should I leave it before I withdraw all my money???

    Report on 26 February 2013  |  Love thisLove  3 loves
  • margaretm
    Love rating 7
    margaretm said

    So pensioners will have even less money to finance their care. If there is absolutely no incentive for the working person to save for their old age and increasing inflation,this short term fix will store up worse fiscal problems for governments to come. Very short sighted.

    Report on 26 February 2013  |  Love thisLove  2 loves
  • jonnie2thumbs
    Love rating 95
    jonnie2thumbs said

    it doesn't matter what they set the interest rate to.

    the UK economy along with most Western economies is like driving your car with the needle in the red - you are glad it is still going but you are certain it isn't going to go on much longer.....

    we keep most of our 'money' in silver coins with the bare minimum in the bank - at least here in France the word for silver is the same as the word for money :)

    Report on 27 February 2013  |  Love thisLove  1 love
  • JRAY100
    Love rating 52
    JRAY100 said

    Can't the banks have larger matresses?

    Forgive the ignornace of someone having spent half a lifetime investing... are they forced to deposit with the BOE?

    Report on 27 February 2013  |  Love thisLove  0 loves
  • PDB11
    Love rating 73
    PDB11 said

    I think the government should give up the idea that getting the BOE to change its interest rate is the best way to manage the economy. It's like trying to steer a car by leaning out of the window!

    Report on 27 February 2013  |  Love thisLove  0 loves
  • r
    Love rating 72
    r said

    @trekdigit:

    That's too obvious! The trouble would be, if interest rates were increased, our prolific governments would than be less able to pay their debts with inflated money. Good for savers and the pensioners but not good for governments that cannnot rein in their spending habits.

    Until we get a government that can model the economy and handle a household budget, it won't happen!

    r.

    Report on 27 February 2013  |  Love thisLove  0 loves
  • athomik
    Love rating 16
    athomik said

    Banks need to be be forced to tow the line and invest in the country, instead of being bailed out by us, only to put the rest of us under more pressure, increase their own profits and pay themselves excessive bonuses for not doing their job. (and as a tax payer who is technically a shareholder in various banks, I've yet to see any dividend payments or other benefit, while the government is considering selling our share off at a discount)

    Even if savers loose in the short term, an improved economy would soon lead to a rise in interest rates. In the meantime, those with mortgages, who are struggling to save their homes, as well as businesses struggling to improve their cash flow and increasing investment and expansion under current conditions can help to fuel more spending and production.

    Mind you, it would be nice to see the government make a bit of an impact on their promises to cut spending and get their own house in order.

    I also believe that for bankers who don't come up to scratch, it should be their job, not the size of their bonus, that's on the line. I believe that the old mantra of "we need to pay outrageous amounts to get the right personnel" doesn't wash any more. Just get bankers who value having a job and who are prepared to put in a bit of work to keep their jobs.

    Report on 27 February 2013  |  Love thisLove  1 love
  • CuNNaXXa
    Love rating 373
    CuNNaXXa said

    It can't be a bad idea to actually force lenders to 'lend'.

    Hoarding their/our money instead of investing in our future is detrimental to our common growth.

    Report on 27 February 2013  |  Love thisLove  0 loves
  • DLZ
    Love rating 12
    DLZ said

    Force the banks to spend their reserves?! It's desperate, and there's no guarantee that it'll not just be used to write off the bad debt.

    Our economy is based on lending to represent the value of the goods we can produce now and in the future, so we have to increase the value or pay off the current over-estimation. Lending is as good as printing money, so it just compounds the problem if we're not increasing the value.

    Lowering the interest rates bolsters the banks balance sheet because they take a bigger cut. Pre-recession the margin on mortgage lending could be as low as 0.2% on lifetime and it's now struggling as low as 2%. This is good for the banks because they can use the extra margin to write off the bad debt and get back to normality.

    Free market alone is not the answer - regulation is needed. Lack of it was what got us here in the first place, and if the money masters hadn't intervened, it would've been a lot worse.

    Fundamentally, we've overestimated our "value" and we have to adjust our spending and start increasing our "value", and since lending won't achieve this, and won't happen, there's no reason to rely on it.

    Report on 28 February 2013  |  Love thisLove  0 loves
  • Weenige
    Love rating 0
    Weenige said

    "Lowering the Bank of England base rate to negative territory would mean banks would be charged for holding their funds at the central bank" Why would they even consider this. All this would mean is that the cost would be passed on from the bank to us. The banks will not lose money either way. What is happening to the people that make these stupid suggestions these days, are they being brainwashed with all these social media sites. Britain, get a grip and find a solution, dont just follow the leader.

    Report on 02 March 2013  |  Love thisLove  0 loves
  • The Bank Manager
    Love rating 74
    The Bank Manager said

    It does kind of contradict the FSA requirements for financial institutions to retain a specific percentage of reserves as liquid assets, should the Bank of England then force them - by using this suggested method - to spend those reserves by way of lending, as the alternative to paying interest to the B of E.

    Without a doubt, the Bank's must lend, but the way to stop the decline of the savings rates any further, is to have the B of E withdraw their Funding For Lending scheme and force the Banks to lend a percentage of their reserves, whilst the Bank's themselves can only generate the funds to lend, by way of paying decent interest rates, to attract savers.

    Power to the People?!

    Report on 02 March 2013  |  Love thisLove  0 loves
  • yocoxy
    Love rating 137
    yocoxy said

    Some people seem to think that the BOE sets tax rates. Er.. That's the Government.

    Gold Nick? The price has spent five years rising and is still pretty close to the top. You might be better off in property ;-)

    Report on 03 March 2013  |  Love thisLove  0 loves
  • CuNNaXXa
    Love rating 373
    CuNNaXXa said

    The Bank Manager said

    ...whilst the Bank's themselves can only generate the funds to lend, by way of paying decent interest rates, to attract savers.

    Well said, that man.

    I am miffed by the fact that most personal loans are in the region of 10% APR while a savings account can still be below 1%. That is one mighty gulf between saving and borrowing.

    It is no wonder that people are diverting money earmarked for saving to other avenues. If their money is ONLY working for the banks, and not them, then what is the motivation for even lending money (commonly called saving) to the banks?

    I think the term is known as greed, and many organisations are now practising this phenomenon. The BIG FOUR supermarkets are known to pay farmers little, then charging a lot, for produce, and now the banks are doing the same, giving little for savings but selling them on as loans for a sizeable chunk.

    I should also point out that my bonus is linked to company profit, so even if I do well, if the company is suffering, so does my bonus. There is no excuse to pay mega bonuses when the overall condition of a bank is suspect. The idea of a bonus scheme is to reward everyone within the institution for helping to promote a viable business model that is profitable, and not a loss or a drain.

    Report on 03 March 2013  |  Love thisLove  0 loves
  • DLZ
    Love rating 12
    DLZ said

    @Bank Manager: The mechanics appear sound - spend the reserves, buckle up, and, oh, pray there are no "unknown unknowns" around the corner.

    Report on 06 March 2013  |  Love thisLove  0 loves
  • DLZ
    Love rating 12
    DLZ said

    Or any "willfully unknowns" (look up "New Labour", "It's a new paradigm").

    Report on 14 May 2013  |  Love thisLove  0 loves

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