Cutting the UK’s official interest rate below zero would be good for growth and could be done without crippling commercial banks, a Bank of England policymaker has said.
Silvana Tenreyro, one of the nine members of Threadneedle Street’s monetary policy committee, said negative rates had worked in other countries and would assist the UK’s recovery from its Covid-19 slump.
In an online speech to the University of the West of England, Tenreyro rejected the argument that the profitability of banks would be adversely affected if the Bank cut the official cost of borrowing – bank rate – from a record low of 0.1% to below zero.
The Bank is looking at the technical feasibility of negative rates for Britain’s financial system, and is expected to publish its views on this after next month’s policy meeting.
Members of the MPC are divided on whether any fresh stimulus should be provided by increasing the purchase of assets under the quantitative easing programme or by following the recent example of Denmark, Sweden and the eurozone and pushing rates below zero.
Tenreyro said she did not want to prejudge the Bank’s review or whether the economy would need additional support but made it clear that she would be in favour of negative rates if the matter was ever put to the MPC.
“My overall assessment is that, while we can never have complete certainty, negative interest rates should with high likelihood boost UK growth and inflation. Cutting bank rate to its record low of 0.1% has helped loosen lending conditions relative to the counterfactual (of no policy change), and I believe further cuts would continue to provide stimulus.”
She added that despite the help provided by the Bank and the Treasury, unemployment was likely to rise in the coming months and it would take time to make up ground lost during the pandemic.
“All else equal, looser monetary policy can help the economy recover faster, bringing inflation back to target, while also preventing some of the job losses and business failures that could otherwise reduce potential output in future.
“It is possible that more stimulus be needed to do so at an appropriate pace. If that is the case, having negative rates in our toolbox will, in my view, be important.”
There was “no clear evidence” from elsewhere that negative rates had reduced bank profits overall, with some studies finding a boost to bank profitability as a result of a faster-growing economy.