Negative interest rates: Policy could have effect on lending – BoE discusses impacts

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Negative interest rates have been speculated due to the ongoing financial issues caused by the pandemic. In March, the Bank of England took the unprecedented decision to significantly lower its base rate to 0.1 percent – the lowest in its history. This also led to more popular providers lowering rates on accounts to reflect the financial hardship the country was going through.

As a result, as the months have worn on, some have speculated negative rates could be the way forward.

However, such a policy, a central bank official has said, may have an impact on lending abilities.

Ben Broadbent, a deputy governor of the Bank of England, said the introduction of negative rates could potentially put a strain on banks.

These providers could then be forced to significantly rein in the lending they do, in order to protect their margins. 

This would help them to make up the costs they could potentially lose as the financial effects of such a policy are felt.

Speaking in a presentation organised by the Bank of England, Mr Broadbent analysed the effects of cutting rates.

He said: “Then the question is: are those pressures enough to mean that these mitigating effects – the downside risks of cutting rates below zero – outweigh the benefits?”

This week, in the central bank’s latest update, it voted to maintain rates at the current low of 0.1 percent.

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However, this does not necessarily mean negative rates have been ruled out in the future. 

In previous months, Andrew Bailey, the governor of the Bank of England has described the measure as being ‘in the toolbox’.

In addition, a number of members of the Monetary Policy Committee (MPC) have discussed the potential benefits of introducing such a policy. 

In October, Gertjan Vlieghe, MPC member described negative rates as potentially offering ‘headroom’ amid a challenging economy.

He commented: “My own view is that the risk that negative rates end up being counterproductive to the aims of monetary policy is low.

“Since it has not been tried in the UK, there is uncertainty about this judgment, and the MPC is not at a point yet when it can reach a conclusion on this issue.

“But, given how low short-term and long-term interest rates already are, headroom for monetary policy is limited. We must consider ways to extend that headroom.”

Previously, MPC member Silvana Tenreyro, said there was “encouraging” evidence the negative rates measure may work.

Jonathan Haskel, speaking at a Barclays Global Inflation conference, said there was “positive evidence” such a move could work for the economy. 

Negative interest rates have never been implemented within the UK previously.

However, there is evidence in other countries the measure may work to help the economy.

Countries including Japan and Switzerland have put forward the measure as a solution when the economy faces financial challenges. 

This week, Mr Bailey pledged to assist the economy in whatever way possible.

He said: “We are here to do everything we can to support the people of this country – and we’ll do it and will do it quickly.”

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