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Negative interest rate looms to help economy

Bank of England

Bank of England may take further action (pic: Terry Murden)

A negative interest rate could help the British economy recover from the downturn caused by the coronavirus, according a Bank of England policymaker.

Silvana Tenreyro, who sits on the Bank’s monetary policy committee (MPC), said cutting the rate below zero – meaning borrowers are credited interest on loans – was among options the nine-member committee is considering.

The Bank has responded so far to the coronavirus pandemic by cutting the interest rate to a record low of 0.1% and expanding its asset purchase programme by £300bn.

Ms Tenreyro told the Sunday Telegraph that evidence from the eurozone and Japan showed that cutting the interest rate below zero had succeeded in reducing companies’ borrowing costs and did not make it unprofitable for banks to lend.

“Banks adapted well – their profitability increased with negative rates largely because impairments and loss provisions have decreased with the boost to activity and the increase in asset prices,” she said.

Tenreyro said she expected Britain’s rebound from the 20% drop in GDP in the second quarter to lose pace as coronavirus cases rise across the country. 

She has clashed with fellow MPC member Andy Haldane over the shape of the recovery, which Haldane, the Bank’s chief economist, insists will be relatively quick and V-shaped.

The economist said it was too early to know whether the scaled-back job support plans unveiled by chancellor Rishi Sunak last week would be enough to stave off a significant rise in unemployment once the furlough scheme ends in October. 

“Another factor interrupting the V is a very weak global outlook, with high uncertainties, particularly with a second wave already striking many countries,” she added.

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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