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Negative interest rates – a cunning plan perhaps?

Nia Williams

February 28, 2013

Tony Ward is managing director of Home Funding

 

There has been an awful lot of bad market reaction to Paul Tucker’s comments to the Treasury Select Committee earlier in the week that perhaps banks should earn a negative rate of interest on money deposited with the Bank of England.

He said that a negative interest rate would mean the Central Bank charges banks to hold their money and could encourage them to lend out more of their funds instead of hoarding it with the Bank.

Speaking to MPs on the Treasury Committee, Mr Tucker said: “This would be an extraordinary thing to do and it needs to be thought through carefully.”

Banks have been quick to assert that if he does this then the consumers will pay with higher borrowing costs and negative deposit rates.

Why?

What he is suggesting may seem radical but it is not as bad as it sounds. In my blog last summer (see http://home-funding.blogspot.co.uk/2012/06/how-central-banks-should-work.html) I talked about the tendency for banks to hoard cash rather than to put it to work as intended by the Bank of England.

There is no reason to link Bank Rate (and hence Base Rate) to the rate at which the Bank of England gives on deposits with them.

Indeed, couldn’t you make a case for banks actually benefitting from the Bank of England’s initiative?

If banks and building societies don’t hoard cash with the Bank and lend it out to companies and consumers, then aren’t they going to be earning more than they currently are?

I know there is a return on capital issue to take into account but I’m sure banks can work that into the calculation of the correct rate to lend at. Mr Tucker’s ‘blue sky’ suggestion is not as daft as it may at first sound.

We need something to stimulate the markets and shouldn’t discount these ideas.

We still need a cunning plan to kick-start the market in my view!

 

 


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