Bank of England policymaker Silvana Tenreyro said there was “positive evidence” that negative interest rates could help banks and the wider economy amid the downturn caused by Covid-19.
“The positive evidence related to negative interest rate policy comes from Europe, where it has worked fairly well,” Tenreyro said in an interview with the Yorkshire Post.
“It led to lower lending rates and increases in lending; and banks’ profitability actually increased,” she added.
The Bank of England is currently reviewing the feasibility of introducing sub-zero interest rates, and recently asked banks about their readiness for such a change.
However BoE governor Andrew Bailey said last month that the Bank was not yet in a position to decide whether to take rates negative.
Bailey told the House of Lords the BoE would not be able to move on negative rates until it had received answers from banks on their readiness for them.
“Only when we get through these questions,” he said, “will we be in a position to say if it is a tool we would use. We are not there at the moment,” the central banker said.
Tenreyro has previously indicated her support for taking rates below zero. In September, she said the BoE had seen “encouraging” evidence that negative interest rates could help the British economy during the coronavirus-induced downturn.
However Bank of England deputy governor Ben Broadbent said last week that policymakers had to consider whether sub-zero interest rates might have counterproductive effects on banks’ balance sheets during times of stress.
Broadbent warned that, in such a scenario, there could be a risk that banks would cut lending to make up for costs and lower margins due to negative interest rates.
“Then the question is: are those pressures enough to mean that these mitigating effects – the downside risks of cutting rates below zero – outweigh the benefits?” Broadbent said.