This article titled “Carney: Bank of England could cut interest rates to zero, but not below” was written by Phillip Inman Economics correspondent, for theguardian.com on Tuesday 23rd February 2016 14.57 UTC
The Bank of England could cut interest rates to zero, but will seek to avoid following Sweden, Denmark and the eurozone by setting negative rates to bolster growth and inflation.
Mark Carney, the Bank’s governor, said Threadneedle Street had “no intention and no interest” in implementing negative interest rates and would adopt the full range of the Bank’s other powers to deal with a downturn in the economy.
He said: “If we were in a position where the economy needed additional stimulus … we could cut interest rates towards zero. We could engage in additional asset purchases, including a variety of assets.
“We could also provide a perspective where we could adjust our policy horizon – in other words we could shorten our policy horizon over which we wanted to return inflation to target.”
Carney, who was responding to questions from MPs on the Treasury select committee, said the world economy had entered a period of low growth and low interest rates and was likely to be prone to financial shocks.
He added that Threadneedle Street might need to respond with additional stimulus measures, but to protect the profitability of the UK’s banks and building societies, the monetary policy committee (MPC) would avoid cutting from the current base rate of 0.5% to below zero.
The message that negative interest rates would be a last resort comes before an expected push by the European Central Bank to deploy the measure on a bigger scale at its next meeting to increase lending and growth in the eurozone.
Japan and Switzerland have also adopted negative interest rates in recent months.
Carney said negative rates in the UK would damage building societies, which would find it difficult to make a profit on mortgage lending if they were forced to pay an interest rate on funds deposited at the Bank of England.
The aim of negative interest rates, which effectively puts a charge on savers depositing funds, is to discourage commercial banks from leaving cash on deposit with Threadneedle Street and lend it to businesses and consumers instead.
Some central banks have also pushed rates below zero to discourage foreign investors from depositing funds and putting pressure on the exchange rate. Sweden and Denmark did so to drive down the value of their currencies to maintain parity with the euro. Japan cut its rates to to depress the value of the yen.
Carney said building societies would find it difficult to make money in a negative interest rate environment.
“We take very seriously the potentially counter-productive impact on the building society sector and the financial sector more broadly.”
He said in Switzerland, mortgage rates have gone up despite the country’s central bank setting negative interest rates. “So it is not clear that the domestic transmission mechanism has been effective,” he noted.
Deputy governor Minouche Shafik said she was sceptical that negative interest rates were passed on by banks to the benefit of customers.
“What we observe from that experience is that the effect is passed on to lower money market rates, but what we don’t see is that it gets passed on to deposit rates,” she said.
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