But the MPC member says the Bank would have to be cautious about undermining the bank funding model if savers start hoarding cash.
By Katie Allen*
A top Bank of England policymaker has floated the possibility of interest rates being cut below zero, meaning companies would pay to deposit their money with banks.
Jan Vlieghe, a member of the BoE’s nine-strong monetary policy committee, did not rule out the idea of following other central banks in taking interest rates negative but said the Bank would “have to think very carefully” about whether the positive effects would outweigh the downsides.
Asked about cutting rates into negative territory, Vlieghe told the Evening Standard newspaper: “Theoretically, I think interest rates could go a little bit negative.”
But emphasising how cautious the Bank would have to be, he added: “Even if you are willing theoretically to consider negative interest rates, there is only so far that they can go negative before you start worrying about the thing that central bankers have been worrying about all these years – which is ‘not only am I not getting any interest paid on my money in the bank, it is now potentially going to charge me, in which case I won’t keep my money in the bank, I’ll just take it out and keep it at home’.
“Once that happens, that is almost certainly negative for the economy because then you undermine the whole bank funding model … so we want to stay well away from that scenario.”
Vlieghe’s willingness to contemplate negative interest rates – where those depositing money effectively pay for the privilege – contrasts somewhat with Bank governor Mark Carney’s stance. Questioned by MPs earlier this week, Carney said: “We think we could move base rate closer to zero but have not said we have an appetite for negative interest rates.”
Interest rates are already at a record low of 0.5%, having been slashed during the financial crisis. Carney has hinted at rate rises in the past but none have been forthcoming and financial markets do not see rates moving from 0.5% this year.
But with economic growth showing signs of slowing amid a global trade downturn and jitters among businesses ahead of the EU referendum, there has been some speculation that borrowing costs could be cut further.
In bids to spur spending and fend off deflation, a number of central banks have taken key interest rates negative, including in the eurozone, Japan, Switzerland and Sweden.
But debate has raged among policymakers and economists over the relative costs and benefits of taking interest rates negative and charging depositors. In Germany, the European Central Bank’s ultra-loose monetary policy has infuriated savers. Finance minister Wolfgang Schäuble said low interest rates were causing“extraordinary problems” for German banks and pensioners and risked fuelling the rise of anti-EU sentiment.
Asked how deep into negative territory interest rates could go, Vlieghe told the Evening Standard it would depend on the costs to large companies of storing, transporting and insuring cash piles.
“Once you start thinking about rates 0.75% negative, companies are going to start taking that seriously. I think the switching point is somewhere around minus 0.5%, minus 0.75%, maybe minus 1%. But I’m also saying I don’t even want to get close to it because I don’t know exactly where it is,” said Vlieghe, who joined the MPC last year.
Central banks’ loose monetary policy attracted the ire of one of the City’s most outspoken economics commentators, Albert Edwards, on Friday.
In a research note he said central banks’ money printing programmes, known as quantitative easing, had made “virtually no difference to the economic recoveries other than to inflate asset prices, make the rich richer, inequality worse and make Joe and Joanna Sixpack want to scream in rage.”
“I have not one scintilla of doubt that these central bankers will destroy the enfeebled world economy with their clumsy interventions and that political chaos will be the ugly result,” said Edwards, strategist at the bank Société Générale.
*) Katie Allen is the Guardian’s economics reporter.
Courtesy of Guardian News & Media Ltd © 2016