Will UK interest rates go negative?

Published ¤ 11/09/2009

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When the Bank of England met in August, it shocked many by increasing the amount of extra money it was pumping into the economy.

The Bank added £50bn into the economy through a process known as quantitative easing (QE) - £25bn more than its original plans to create up to £150bn on the UK's balance sheet by, in effect, printing money.
Some suggested this was a sign that Bank Governor Mervyn King does not think that QE is working yet.

And the central bank has cut interest rates to a record low of 0.5% in an attempt to boost lending in the economy.

At its September meeting, the Bank's Monetary Policy Committee (MPC) decided to stick at that level for the sixth consecutive month.

But should the men that set our interest rates now consider reducing them to below zero?
Swedish case

The British Chambers of Commerce (BCC) suggested on Wednesday that this should be the case.

"One must now question the conventional view that cutting rates below 0.5% will not help," said BCC chief economist David Kern.
"By cutting rates further and by considering, in limited circumstances, a negative interest rate - along the lines adopted in Sweden - the MPC could discourage hoarding of cash, and encourage lending," he added.

The discussion among economists of negative interest rates comes directly from what happened recently in Sweden.
In July, the Swedish central bank - the Riksbank - surprised many when it set a rate at -0.25% - below zero for the first time.

That was on the deposit rate - the rate on money left by commercial banks at the central bank, which it normally earns positive interest on.

Banks were, in effect, being charged for keeping money at the central bank rather than lending it out to consumers and businesses to boost consumer spending and growth.

Riksbank head Stefan Ingves said it was better for banks to be "active" rather "than just sit on the money".
Extra lending is, of course, the point of QE. Banks in the UK currently have about £136bn in reserves held at the central bank, according to the most recent official figures.

The idea that the UK could adopt that model was further stoked by comments that Mr King made on the Swedish policy decision.

"It's an idea we will certainly be looking at, whether the effectiveness of our asset purchases could be increased by reducing the rate at which we remunerate reserves," King told reporters recently.
He has been worried that banks are hoarding the extra cash that has been given to them, rather than lending it out to the wider economy.

This makes it seem likely that the Bank will adopt a negative interest rate in the near future.

Or does it?
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