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MPC split

Bank policymaker plays down negative interest rate

Bank of England

Bank of England members are divided (pic: Terry Murden)

A Bank of England policymaker has raised doubts about introducing negative interest rates and played down the prospect of such a move any time soon.

Sir Dave Ramsden, deputy governor, told the Society of Professional Economists that the Bank’s monetary policy committee was “not about to use [negative interest rates] imminently”.

He added that it would “take time” to engage with the banks.

“At present, negative policy rates would be less effective as a tool to stimulate the economy,” he said.

The Bank has so far tackled the pandemic by cutting rates to 0.1%, but some members of the MPC want to go further.

Silvana Tenreyro, an external member of the committee, told the Sunday Telegraph that evidence from other European countries and Japan suggested that negative interest rates had succeeded in cutting borrowing costs.

If interest rates are negative, the BoE charges for any deposits it holds on behalf of the banks. That encourages banks to lend the money to business rather than deposit it.

But with interest rates already at a record low, it’s not clear how much negative rates would help stimulate new activity.

It would also add to strains on the banks which are facing the prospect of rising bad loans as firm go bust.

What is a negative interest rate?

A negative interest rate occurs when borrowers are credited interest rather than paying interest to lenders. 

Banks charge interest to keep cash with them, rather than paying interest.

The negative interest rate is meant to be an incentive for banks to make loans during a period in which they would rather hang on to funds.

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