Bank likely to ignore pressure to set negative UK interest rates

There is virtually no chance of the Bank of England's Monetary Policy Committee announcing a change in interest rates or in its programme of quantitative easing today.

Analysts say the bank rate is almost certain to stay at 0.5 per cent well into next year, while there is also likely to be no change to the Bank's policy of injecting new money into the UK's financial system, which was increased by £50bn to £175bn last month.

Last night, however, there was speculation in the City that the Bank might want to make its quantitative easing programme more effective by imposing a "negative interest rate" or fee on reserves and other deposits held by the commercial lenders at the Bank.

The idea is that this would induce them to lend the money being pumped into the financial system by the Bank to business and households instead, and stop them "hoarding" the cash.

The speculation began after Charles Goodhart, a former policymaker at the bank raised the possibility at a conference a few weeks ago. At the launch of Bank's August inflation report, the Governor, Mervyn King, also seemed willing to consider such a move, saying: "There is no doubt the interest rate we pay on reserves does affect the incentives which banks face to turn those reserves bank by bank individually into other assets. It is an idea we will certainly be looking at to see whether in fact the effectiveness of our asset purchases could be increased by reducing the rate at which we remunerate reserves."

The Swedish central bank, the Riksbank, has imposed a negative interest rate of minus 0.25 per cent on operational deposits its banks hold with it.

Despite the gossip, a move by the Bank of England towards negative rates seems unlikely. The Riksbank facility is very small in any case and offers a poor precedent. There are also some formidable practical difficulties with a negative bank rate, including the problems banks and building societies would have attracting savers, and contracts written with a link to bank rate assumed to be positive. Growth in reserves is inevitable when the Bank increases money supply, and does not necessarily represent a problem in the creation of "broad money", or lending to the real economy. In some data, that has shown signs of faster growth recently.