BoE deputy governor opposes negative interest rates

Michelle K. Wallace

One of the Bank of England’s deputy governors has voiced strong opposition to setting negative interest rates, saying he thought the benchmark could not be lowered any further without counter-productive results.

Speaking in a recorded interview with the Society of Professional Economists, Dave Ramsden, deputy governor for markets and banking, said on Monday that although the central bank had negative rates in its toolbox, he did not think the policy should be used

“I see the effective lower bound [for interest rates] still at 0.1 per cent which is where Bank rate is at present. It is useful to stress that,” Sir Dave said.

His views on negative rates, which were not known specifically, demonstrate the strong opposition among many of the nine monetary policy committee members to push interest rates below zero for fear that the action would undermine the health of the banking system and not provide any economic stimulus.

They contrast with those of Silvana Tenreyro, an external MPC member, who reiterated her view at the weekend that there was “encouraging” evidence from other countries. She suggested negative rates lowered borrowing costs in the economy and helped banks because the boost they gave to borrowing and spending reduced bad debts.

Ms Tenreyro has not voted for negative rates yet, however.

MPC members have been wrangling over negative rates since putting the policy “in the toolbox” in August while also agreeing that quantitative easing — printing money and purchasing government debt — was currently a more effective stimulus.

In the minutes of its September meeting, the MPC announced it would begin “structured engagement” with the financial sector between October and the end of the year on the “operational considerations” of negative rates.

This sparked speculation in financial markets that the BoE was about to set negative rates and futures markets still think there is a 50:50 chance the MPC will press the button on negative rates by its February meeting.

Sir Dave was keen to stress he did not see the need to change policy quickly. “We’re not about to use [negative rates] imminently,” the deputy governor said.

His reasoning was that with banks unlikely to set a negative rate on retail deposits, effectively charging customers to hold their money, the central bank would squeeze banks’ profits if it set a negative rate, leading to less lending and stimulus rather than more.

He said the timing also mattered and the case for negative rates would be stronger in an economic recovery rather than at a time that banks were likely to discover many losses on loans resulting from households and companies unable to service their debt.

MPC members are accountable for their individual views and votes on the committee, and only Sir Dave, governor Andrew Bailey and Ms Tenreyro have specifically set out their views on negative rates since August.

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