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John-Phillips

February 28, 2013

Frank Eve is managing director of Frank Eve Consulting

 

The deputy governor of the Bank of England (BOE), Paul Tucker, has raised the idea of negative interest rates as a way of turning the economy around, he did add that “it would be an extraordinary thing to do and it needs to be thought through carefully.”

It would certainly be unusual, radical and I think dangerous.

It would also be a disaster for savers and pensioners who are already suffering from the effects of very low interest and annuity rates as a result of Quantitative Easing.

The BOE has already said that it will not act to curb inflation in the short term and the UK inflation rate will be above target for several years yet, so interest rates have to be set against this background.

However, the main question should be – would negative interest rates work?

Would we see more lending to those parts of the economy that need it?

The simple answer is no.

It’s not the supply side of the market that needs a boost; even lower interest rates will not make any difference for small businesses or first time buyers.

With first time buyers it makes it even more difficult to save a deposit.

The major demand comes from areas of the market where lenders currently don’t want to lend and are not being encouraged to by the regulator.

An important factor, as I outlined in my previous post, which should not be overlooked is that more and more stimulus is like giving more and more heroin to an addict; it doesn’t sort the problem – it only adds to it and what happens when you have to stop?

If international investors are spooked or realise that we have run out of sensible ideas to encourage growth, we could have a full blown sovereign debt crisis and interest rates could go up, not down.

The crisis is not over we are still on the knife edge.

Nice try Mr Tucker but think again.

 


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