JUST in case anybody was still in doubt that yet more quantitative easing (QE) and extraordinary monetary measures are on the cards, Paul Tucker, the Bank of England’s deputy governor, could not have been any clearer yesterday. He even raised the prospect of the Bank of England imposing negative nominal interest rates, at least on commercial banks’ reserves lodged with it, in a bid to get the money circulating instead. We already have negative real interest rates at the moment, with the interest far lower than the rate of inflation. But negative nominal rates would represent a complete break with the status quo: depositors would have to pay their bank, rather than the other way around. It is clear that the Bank remains extraordinarily dovish: quite remarkably, it is still trying to loosen monetary policy further.
Yet there is a simple reason why banks are keeping money at the Bank: they need to retain liquidity, for regulatory and prudential reasons. If they are forced to find another safe haven for their cash, we can be sure it won’t end up being lent out to small firms, which thanks to new rules comes with penal capital costs. More broadly – and going further than the limited measure Tucker floated yesterday – the idea that negative interest rates could even be on the cards is ominous. In theory, if the Bank of England were to cut its interest rate to below zero, and your bank were to start charging you to keep cash, you might choose to withdraw everything and keep the cash under your pillow. This would annihilate the banking system and cause an immediate depression.
In practice, however, a few banks around the world in recent years at times did charge slightly negative rates on some deposits for some periods, when the rate at which money could be lent out at also collapsed, and these were largely accepted – just as people would understand they have to pay a bank to keep valuables such as jewellery in a store. But negative rates are probably only viable briefly, on the margins, on high net wealth bank accounts. Applied on the high street in the UK, the consequences would be catastrophic. Under today’s more stringent rules, banks need deposits to finance any lending; they can no longer rely as much on money market funds. Having to fight for deposits in a context of negative nominal rates would probably lead to a credit crunch.
Most importantly of all, negative interest rates would decimate savers. They would be the sort of policy that is almost designed to undermine the middle classes, especially those with relatively modest assets and savings. They would chip away at a key foundation of capitalism and a demographic with a vested interest in its preservation; down that road lies Italian or French style poujadisme and middle England rage.
The Centre for Policy Studies provides useful context. QE has already been larger, relative to GDP, in the UK (22 per cent) than in either the US (13 per cent) or the Eurozone (4 per cent). It has helped mop up 46 per cent of the massive issuance of UK sovereign bonds over the past five years – the volume of outstanding gilts has increased by two and a half times in just five years, by £832bn, the equivalent of £33,000 for every UK household, much of which has been monetised. QE has crippled savers, who are losing an estimated £65bn a year in interest forgone, according to Ewan Stewart, author of the research. Between January 2008 and December 2012, sterling lost 17.2 per cent of its purchasing power thanks to inflation. Why are we still so obsessed with loosening monetary policy yet further?
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