Q&A: So what is a 'negative interest rate?'
people have to make regular interest payments to their lenders when they borrow
money. Under a system of negative interest rates this relationship would be
turned on its head and the lender would pay the borrower for the privilege of
So why would people lend in those circumstances?
They wouldn’t – that’s the idea. The Bank of England is examining the case for charging interest on the funds that commercial banks hold on deposit at the central bank in order to encourage these high street lenders to do other things with the money, such as lend it to companies and households.
Why aren’t the banks doing this already?
They are still traumatised by the 2008-09 financial crisis when many of them almost went bust. They want to keep large amounts of “liquid” reserves at the central bank so that if they get into trouble again they can bail themselves out.
But isn’t that prudent behaviour?
The Bank of England and the Financial Services Authority think the banks have taken prudence to a fault – and that the real economy is suffering as a result. While the banks hoard reserves, they are not lending enough. The amount of credit in the economy is still contracting. This is one of the reasons why the economy has barely grown since 2010 and that we now teeter on the brink of a triple dip recession.
So what’s the catch?
Some analysts warn that if the regulators were to hit the banks with negative interest rates on their central bank reserves the result would not be a healthy surge in lending, but some nasty charges for bank customers. The banks’ profits would automatically fall and they would seek to recoup this by cutting the sums they pay to savers, or even seeking other forms of revenue such as imposing charges on anyone who has a normal current account.
So wouldn’t the Bank of England be mad to do it then?
Not necessarily. Although Bank of England officials never admit it in public, monetary policy has been ultra-loose since the 2008 financial crisis precisely because policymakers want to penalise saving and encourage saving. They think that too many people and firms are paying down debt at the same time, undermining the economy. They want to encourage spending not saving.
- 1 Howard Jacobson: Let's see the 'criticism' of Israel for what it really is
- 2 Brazil vs Germany World Cup 2014: In defence of Mesut Ozil - the Arsenal midfielder works magic in the shadows
- 3 Do you know this man? Amnesia sufferer found in park pleads for help in identifying who he is
- 4 PornHub begs users to stop uploading video clips of Brazil getting beaten 7-1
- 5 Tony Abbott embarrasses Australia by praising Japanese WWII military, ‘getting on the sake’ and posing for ‘crotch-shot’ photo opportunity
Game of Thrones author George RR Martin says 'f*** you' to fans who fear he will die before finishing Westeros saga
Jennifer Lawrence face palms Emma Watson at Christian Dior show in Paris
Mick Jagger denies being World Cup curse and reason for Brazil’s embarrassing defeat
Gingers face extinction due to climate change, scientists warn
Do you know this man? Amnesia sufferer found in park pleads for help in identifying who he is
Sustained immigration has not harmed Britons' employment, say government advisers
British jihadist calls for 'flag of Islam' over Downing Street and Buckingham Palace
Australia facing international condemnation after turning around Sri Lankans at sea
7/7 memorial defaced on anniversary of 2005 attacks with ‘Blair lied thousands died’ graffiti
Even when it brutalises one of its own teenage citizens, America is helpless against Israel
There’s a nasty smell in the political air – and it’s coming from the Tories
iJobs Money & Business
£30000 per annum: Harrington Starr: A global leader in trading platforms and e...
£28000 per annum: Harrington Starr: A fast growing consultancy to the financia...
£30000 per annum: Harrington Starr: Technical Support Analyst - Liverpool Stre...
£65000 per annum: Harrington Starr: One of the world's largest privately owned...