Bank of England chews over negative interest rate plan

Tim Wallace
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A MAJOR new review of banks’ liabilities announced yesterday could bring the Bank of England closer to making a decision on taking interest rates to zero or even into negative territory.

The Bank’s quarterly review details plans to record and monitor lenders’ funding sources like deposits and bond issuance, and the implications of any changes on lending to households and firms.

Previously the central bank has only closely monitored assets – banks’ loans – rather than both sides of the balance sheet.

This quarterly study will be used to inform monetary and financial policy decisions, the report explained, particularly around money and credit growth, and banks’ funding conditions.

The monetary policy committee (MPC) has several times recently considered the impact of cutting interest rates to or below zero.

In part it has decided against such a step so far because it worries about the implications for savers, the risks of driving deposits from institutions and the impact on building societies which rely on deposits rather than markets for funding.

This review will give the Bank more information on depositor and market behaviour, and a better picture of lenders’ funding positions, allowing the MPC a clearer view of the implications.

Meanwhile another report in the review also warned that the public finances of future governments will be damaged by the Treasury’s decision to take the Bank of England’s proceeds from its quantitative easing programme.

In its report the Bank warns that the Treasury will have to pay a higher amount back when the gilts are eventually sold.

“The initial transfer of cash to (the Treasury) is followed by large offsetting cash transfers back in the future,” it said.