Industry reacts to negative interest suggestion

Robyn Hall

February 28, 2013

The deputy governor of the Bank of England had suggested a move to negative interest rates as a way to encourage banks to increase lending levels.

Andy Bell, mortgage & general insurance manager at Positive Solutions, said: ‘While we welcome any potential action to encourage lending we agree with the deputy governor of the BOE when he says this would be an extraordinary move and the potential downside is the adverse effect on savers.

“Our concern would be that while it appears that the negative interest rates would apply to commercial, not retail, customers, there would potentially be an adverse knock on effect for savings rates.”

However bell said that whilst he is concerned by a possible negative knock on he could see why Bank would investigate such an option if negative interest rates would aid lending to the SME sector and stimulate growth.

Ben Thompson, managing director of Legal & General Mortgage Club, said: “It does seem a little strange that we are still obsessed with yet more stimulus.

“We already have record low interest rates for most borrowers and effectively negative interest rates for savers, when accounting for inflation.”

Thompson said that what is clear is that things are still far from normal the suggestion of negative interest feels like a ‘step too far’.

“The principle of dis-incentivising the holding of cash with central banks feels interesting however unless there is a cast iron guarantee in place to ensure that any release of funds ends up in the desired places there appears to be little point in pursuing.”

Thompson added: “If this were to happen, the only likely outcome for mortgage borrowers would be increased competition and lower prices – price is not the issue though, and as with businesses we need any increase in funding to go to new, appropriate and worthy borrowers, not to further line the pockets of the fortunate who already have access to cheap borrowing.”

David Brown, commercial director of LSL Property Services, agreed, adding: “The cost of finance is not the underlying problem holding back the number of sales taking place.

“The real problem is a lack of lending to buyers without substantial deposits. We have seen a little improvement on availability in the last couple of months, but first time buyer numbers are still a far cry from their previous peaks.

“Negative interest rates would be an unprecedented measure, but wouldn’t remove this particular obstacle.”

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