Interest rates could be slashed into negative territory for first time ever
Negative bank rate would mean lenders cut mortgage rates even further – but savings rates would also go into reverse
Interest rates could be cut to below zero for the first time in history to save the UK economy from ruin in the event of a chaotic no-deal Brexit, a former Bank of England policymaker has warned.
David Blanchflower, who sat on the Bank’s monetary policy committee,from June 2006 to June 2009, told the Press Association that policymakers maybe left with little option but to take rates into negative territory if a no-deal Brexit sends shock waves through the economy.
That would mean that commercial banks have to pay the Bank of England money to hold cash deposits with it – boosting incentives for them to lend to households instead. Interest rates on savings and mortgages could be cut to below 1 per cent
In a savage critique of the Bank’s recent scenario analysis of Brexit, he said Governor Mark Carney and his team were’stupid’ to indicate that rates could even rise in a disorderly withdrawal.
It comes after the Bank’s controversial ‘doomsday scenario’ report,published at the request of MPs on the Treasury Select Committee, warned that interest rates could rise as high as 5.5 per cent if a plunging pound sent inflation soaring.
Mr Blanchflower said: ‘It was stupid what they said.
‘That was a big error. It would kill the British economy stone dead. The first thing you would have to start thinking about would be negative rates.’
The British-born economist, who moved to the US in 1989, said the bank had ‘very few arrows in the quiver’ to boost the economy, with rates at just 0.75 per cent having only recently been lifted off all-time lows.
He said this would mean negative rates ‘have to be on the table, because you’d be trying to encourage people to spend and not save’.
His comments come after current MPC member Gertjan Vlieghe also took aim at the Bank’s Brexit analysis, saying in a speech earlier this month that rates were more likely to be cut than hiked in a no-deal scenario.
WHAT WOULD NEGATIVE INTEREST RATES MEAN FOR YOU?
Base rate, also known as bank rate, is the rate the Bank of England sets for lending money to other banks – and also what it pays on deposits that they hold with it.
This trickles down to impact how much interest borrowers have to pay on their loans and how much interest savers earn from their savings.
Arise or fall in base rate would have an immediate effect on anyone on a variable or tracker mortgage or savings account, but for the majority of mortgage holders on a fixed-rate deal, or fixed rate savers, the impact wouldn’t immediately be felt.
Mortgage and savings rates don’t always follow bank rate though. Since the central Bank raised base rate in August last year mortgage rates have actually got cheaper thanks to increased competition in the market.
But a dramatic cut into negative territory would have an impact on both savings and mortgage rates.
A cut to below zero would mean it would cost commercial banks money to hold deposits with the Bank of England, increasing the incentive for that money to be lent to households instead.
This would inevitably lead to a corresponding drop in both mortgage and savings rates. It is unlikely savers would actually be charged for saving money with commercial banks, but rates would be cut probably to record lows.
This would discourage saving and help to incentivise consumer spending, in theory giving the economy a boost. It would also have the added benefit of making money cheap to borrow for businesses, incentivising investment.
This would spell good news for potential first-time buyers and those looking to remortgage as mortgage rates fall again. Rates are already at near record lows,and could drop below 1 per cent in a negative interest scenario.
The warning over negative rates confirms that the UK could be heading into uncharted economic territory if a deal is not secured.
While the financial crisis was unprecedented, the Bank at least had plenty of room to cut rates to help contain the fallout.
But Mr Blanchflower – a lone voice on the MPC calling for rates to be cut in 2008 when others failed to see the scale of the recession on the horizon– said the Bank could also look to rekindle its quantitative easing programme again if needed.
He said it could ‘broaden out what it buys’under QE, perhaps looking to buy student loans or property.
But monetary policy alone would not be able to fix the crisis that would be sparked by a cliff-edge Brexit, with government and fiscal measures also vital, he said.
‘The obvious thing would be to cut VAT by five basis points, increases pending like there’s no tomorrow and scrap austerity,’ he said.
While the Bank’s last inflation report kept open the prospect of further rate rises, Mr Blanchflower said hikes were ‘dead in the water’.
With the global economy slowing and growing whispers of a US recession around the corner, he said Brexit was coming at a bad time.
‘Whether attributable to Brexit or not, there’s a slowdown coming,’ he warned.
Article sourced from an article by Adrian Lowery for Thisismoney website website on 25th Feb 2019 . Original full article can be viewed by clicking link below
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