Is it time for negative interest rates?

Savers and borrowers have had to contend with historically low interest rates in the UK for almost four years.

If Bank of England deputy governor Paul Tucker gets his own way, we could see a period of negative interest rates.

Should this happen, the Bank of England would start charging high street banks to hold their money, which would hopefully encourage them to lend more to individuals and businesses.

Tucker raised the prospect of negative interest rates today, delivering evidence to MPs on the Treasury Committee. He referred to it as an “extraordinary thing to do” which would need to be “thought through carefully”.

As things stand, the Bank of England has very little wriggle room when it comes to stimulating the British economy.

Their asset purchase programme of quantitative easing appears to have run out of steam, with little conclusive evidence it has had the desired effect of boosting economic growth.

There are more positive signs from the Funding for Lending Scheme, although new figures from the British Bankers’ Association (BBA) show lending to businesses fell by 5.7% for the year to January.

As an alternative to negative interest rates, the Bank could launch a helicopter drop initiative; for example sending every taxpayer a one-off ‘bonus’ of £1,000 to go out and spend.

Whilst we don’t expect to see negative interest rates or helicopter drops being announced in the short term, some of the recent commentary from senior people at the Bank of England suggests we are being softened up for the possibility.

Clearly negative interest rates would be bad news for savers, who have already suffered from very low interest rates in the current economic downturn.

It is also possible that many borrowers would not benefit directly, with the terms and conditions on many mortgage contracts preventing a payment of interest each month from the lender to the borrower.

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