Now is not the time for negative rates, says BoE deputy

Tom Rees
·2-min read
Bank of England
Bank of England

Negative interest rates would risk squeezing banks that are already grappling with the economic crisis, the Bank of England’s deputy governor has argued.

Sir Dave Ramsden, a rate-setter on the Monetary Policy Committee (MPC), added to the growing debate on Threadneedle Street by suggesting he wants to hold fire on using the controversial tool for the first time. 

He argued there is “plenty of headroom” remaining on quantitative easing (QE) - the Bank’s vast bond buying programme - as signs of a divide on the MPC ahead of November's meeting emerge

Sir Dave reined in hopes of an imminent cut to rates from the record low of 0.1pc but said the unconventional policy tool could still be needed.

The second Covid wave and tightening local restrictions have boosted hopes of further stimulus with the Bank opening the door to sub-zero rates. Negative rates lower borrowing costs and encourage lending by penalising banks holding on to excess money.

However, Sir Dave warned of the hit to profitability lenders would face from the policy and stressed differences between banking in the UK and other countries and blocs already using negative rates, such as the eurozone.

He warned that the blow to banks “could reduce or even counteract the stimulus from negative rates” by hurting profitability.

The tool was not appropriate yet given “the economy and the financial system are already grappling with the effects of an unprecedented crisis, as well as the myriad uncertainties the crisis has created”, the ex-Treasury economist said.

Sir Dave’s comments suggest a divide over the tool could be emerging on the Bank’s rate-setting committee. 

Gertjan Vlieghe, an external MPC member, talked up the prospect of negative rates on Tuesday, arguing their “effect has generally been positive”. He warned that QE “is probably less potent now than in March”.