Bank of England policymakers consider negative interest rates

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

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.

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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.

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