The world’s second oldest central bank, the Bank of England, is charged with setting monetary policy. Their main aim is to keep inflation rates low and stable to ensure the stability of the UK economy. The Central Bank states that two years are needed for these changes to take full effect, so this is the immediate time frame that the committee of 9 members must consider when making policy decisions.
The Bank of England has so far responded to the pandemic by cutting interest rates to just 0.1%. However, in August it was announced that negative interest rates were among the tools being considered by the Bank of England. This means the Bank of England would charge for any deposits it holds on behalf of banks. The idea is that banks would therefore be more likely to lend out money to businesses rather than deposit it.
This is a controversial policy and risky business for banks, though its not a new idea. Central Banks who have set negative interest rates include Japan, Sweden, Switzerland and the European Central Bank. Swiss Bank UBS charged 0.6% interest rates on deposits of more than £450,000 and Jyske Bank in Denmark launched a 10-year mortgage with a minus 0.5% interest rate. This meant that the bank reduced the outstanding loan each month by more than the home owner repaid.
During the spring and summer of this year, the Bank of England investigated the impact of negative interest rates. The Bank’s final report is due in December of this year, leading some to speculate negative interest rates could be adopted by spring 2021. This speculation has provoked a mixed response from the British financial community – to say the latest – but how likely is it that negative interest rates will be set?
Opinion amongst the nine decision makers seems divided. Silvana Tenreyo said the investigation had found “encouraging” evidence . However, Governor Andrew Bailey stated the use of negative rates had achieved “mixed” results globally, emphasizing timing and structure of a country’s banking system as key factors. Governor Deputy, Sir David Ramsey has stated “At present, negative policy rates would be less effective as a tool to stimulate the economy.”. While financiers eagerly await further news, a fourth member of the committee, Andy Haldane, urges calm with regards to the economy in general. Accusing the media of only reporting bad news, Haldane stated :
“My concern at present is that good news on the economy is being crowded out by fears about the future. This is human nature at times of stress. But it can also make for an overly pessimistic popular narrative, which fosters fear, fatalism and excess caution. This is unhealthy in itself but, if left unaddressed, also risks becoming self-fulfilling.”
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