Sub-zero interest rates are a trick which – in theory – could allow monetary policy to do something more effective in a depressed economy than, in the phrase, push on a piece of string
The suggestion of negative interest rates sounds like madness, and maybe it is. But if the credit crunch has taught us one thing, it is how rapidly ideas can go from far out to fact. Since queues formed round Northern Rock branches in 2007, in the first run on a British bank since the 1860s, we have witnessed interest rates plumbing unprecedented depths, the nationalisation of swaths of the financial sector, the Bank of England switching on electronic printing presses, and – most recently – the Treasury swiping the interest on the gilts the bank thereby acquired. In every case the unthinkable was scarcely thought before it came to pass, and so – in the light of Paul Tucker’s remarks on Tuesday – it is worth pausing to ask whether savings accounts could soon pay less than piggybanks.
In the extraordinary context of the triple-dip economic contraction, which new data confirmed yesterday, the deputy governor of the bank told MPs he had raised the setting of negative rates as a potential response. It was not a meticulously prepared intervention, and – with his fellow deputy, Charlie Bean, now damping it down – one might almost imagine Mr Tucker was stirring things up for Mark Carney, the Canadian who beat him for the top job. But that is too flippant; there was logic to his remarks. Like quantitative easing, sub-zero rates are a trick which – in theory – could allow monetary policy to do something more effective in a depressed economy than, in the phrase, push on a piece of string.
Regular rate-cutting hit its limit four years ago when borrowing costs first fell to 0.5%. QE was then unleashed to stuff the vaults of the banks with ready cash, in the hope this would make them lend. They didn’t, but instead too often preferred to squirrel their new funds at Threadneedle Street. Mr Tucker’s understandable thought is that if the bank could only force them to pay for the right to do that, by charging negative interest, then the money men might at last be persuaded to part with their dough, and lend it out to the real economy.
With nothing else working, novel suggestions ought not be dismissed. But there are formidable obstacles in the way of this particular scheme. First, at a practical level, there are all sorts of questions: can the authorities prevent individual banks responding by hoarding £50 notes in their own safes? Could commercial banks survive in a world where the official position was that saving didn’t pay? If not, would it matter, and what would replace them?
Secondly, there are the fraught politics of