When Monetary Policy Committee member Paul Tucker mentioned that some at the Bank had been considering negative nominal interests rates yesterday he knocked the pound down to below 1.51 against the dollar. While sterling regained some strength during the day, it's fallen back down to around that 1.51 level again this morning.
Our banking specialist Tim Wallace writes:
Paul Tucker, deputy governor of the Bank of England, told MPs: “Nobody on the Monetary Policy Committee thinks that quantitative easing has reached the end of the road and that it is not a useful instrument anymore.”
The Bank also believes that the unprecedented step of imposing negative interest rates could help jolt Britain’s flatlining economy by boosting lending, at a heavy cost to savers.
“It would be an extraordinary thing to do and it needs to be thought through very carefully,” Tucker said.
While the idea was merely fluttered - with continued quantitative easing being far more likely - even the prospect of negative rates has been enough to keep sterling weak. Allister Heath writes on precisely why such a policy would be the last thing the economy needs:
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.