16:20 PM, 26th February 2013, About 10 years ago 6
Paul Tucker the deputy Bank of England governor has told the Treasury Committee that negative interest rates should be considered.
A negative interest rate on bank reserves held at the Bank of England would theoretically encourage an increase in lending to stimulate the economy as banks would be charged for keeping money at the Bank of England rather than lending it out.
This is a very bold statement from the Bank of England and shows a new found aggression to tackle the stagnant GDP figures over the paralysing obsession to control the inflation rate. With the Bank Base rate already at 0.5% and Quantitative Easing having little effect despite injecting £375billion into the system maybe now with a new Governor due to start soon the timing is right.
The economy is however like the natural world where you can’t effect one thing without a corresponding negative effect on another. If you decrease interest rates you attract less foreign currency reducing the value of the Pound and making imports more costly such as fuel, and raising inflation rates, but your goods abroad are cheaper which should encourage exports and increase GDP.
Also for the last few years the banks have been forced to recapitalise, by holding more assets compared to the amount they lend in an effort to secure the banking system from future collapse. A negative interest rate would seem like encouragement to do the reverse. People may be encourage to spend and borrow more boosting the economy, but what about savers as the UK still has a very high debt per household ratio compared to other countries.
I really don’t know if this is a serious suggestion, or if it will ever happen, but I am pleased after the slowest recovery from recession in history that someone is finally thinking outside the box.
Now how about halving corporation tax to 11% for an idea. Surely it is better to get 11% of a very big pie than 22% of very little. All the big corporations might wake up “smell the coffee” and move their profits to the UK. It is the cost of Bureaucracy and a lack of incentive to achieve that is holding us back in Europe compared to other parts of the world in my opinion.