Martin Lewis: Negative interest rates introduction is 'plausible'
Negative interest rates have been discussed in recent months due to the ongoing impact of the coronavirus crisis. Earlier this year, the Bank of England took the decision to lower its base rate to an historic low of 0.1 percent – a move which shocked the UK. As a result, many familiar providers found themselves following suit, lowering rates meaning savers received less of a return on their money.
It was then speculated in some quarters that rates could even go lower – to a sub zero level for the first time in the UK.
This was further fuelled by the central bank’s decision to launch a formal review into negative rates this year, to investigate ways to fight back against a potential recession.
It was then decided the move to negative interest rates was simply “in the toolbox” of measures, BoE governor Andrew Bailey commented.
However, an external member of the Monetary Policy Committee (MPC) has now suggested the prospect of negative interest rates may not be as disastrous as they appear on the surface.
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The central bank’s Michael Saunders said his view was that rates can be cut below zero, if such a move becomes necessary.
Such an action, he suggested could mean the “net effect may even be slightly positive”.
But he warned that there would need to be the right level of “mitigation” in place for such a measure to be taken.
Speaking at an online webinar, he said: “In my view, there may be some modest scope to cut Bank Rate further, but if we do, it may be preferable to move in relatively small steps.
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“My judgment at present is that the Effective Lower Bound for the UK is probably at little below zero, provided appropriate mitigations are in place.
“Positive news on vaccines has reduced some downside risks facing the economy.
“But we are not out of the woods yet, and there are some headwind that could leave the economy stuck with persistently high unemployment and below-target inflation.”
It is clear, however, there is split opinion from central bank members on how to proceed with interest rates.
In recent months, a number of MPC members have expressed the potential for negative interest rates to be implemented in the UK.
Gertjan Vlieghe, a member of the MPC said his own view was “the risk that negative rates end up being counterproductive to the aims of monetary policy is low”.
Previously, Jonathan Haskel and Silvana Tenreyo, also MPC members, said there was “positive” and “encouraging” evidence respectively on the effectiveness of negative rates.
Negative interest rates have never been implemented within the UK’s economic history.
However, such a move is a tried and tested method elsewhere in the world.
Countries such as Japan and Switzerland have used the measure to provide a boost to their respective economies in difficult financial periods of time.
Overall, savers have faced dire returns on their money generally this year which has been put away with banks and building societies.
But it is hoped there will be economic recovery in 2021 which will improve the situation going forward.
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