Speaking to the Treasury Committee Paul Tucker, the Bank of England Deputy Governor, has said that the use of negative interest rates should be considered.
So instead of banks receiving interest on the cash they park overnight in the Bank of England, the bank would instead have to pay to place the money in the safekeeping of the BoE. This has been likened to a tax on money.
This would then encourage the banks to cast about for better places to put the money where they could get a profit on it instead of suffering a loss. Maybe, the thinking goes, leading them to lend the money out to businesses and consumers so boosting the economy.
Mr Tucker told the MPS that “This would be an extraordinary thing to do and it needs to be thought through carefully”. He went on to say that the subject had been raised as another way of helping the economy and that he hoped that “…we will think about whether there are constraints to setting negative interest rates”.
The case for imposing a negative interest rate has been made in other countries and was used by the Swedish in 2009 when the Riksbank lowered rates to -0.25%.
And as Former US Federal Reserve official Alan Blinder says (finance.fortune.cnn.com/2013/01/25/alan-blinder-interest-rates/), 'My bank pays me one basis point on my checking account. Why are you paying my bank 25 basis points on their checking account?'
Of course the level at which a negative interest rate was set to get a result would be a reflection of the perceived general risk to the banks of lending it out into a sick economy. The banks are already lending to the secure and squeaky clean. To lend more would possibly mean lending out to more risky companies and individuals, something they are avoiding doing at the moment. And this is their business decision.
One wonders if setting interest rates to -0.25% in the UK for deposited cash would be a cost that banks were actually willing to pay for security. How far negative would it have to go to get the money really flowing?