Negative interest rates proposed to boost bank lending

In a meeting of the MP Treasury Committee this week, Bank of England Deputy Governor Paul Tucker put forward the idea of setting a negative interest rate in the UK, as businesses continue to struggle to access bank funding. Such a plan would involve banks having to pay the central bank a fee for keeping cash in its coffers, which, in an ideal world, would incentivise banks to increase their lending activity to SMEs and thus contribute to economic growth. However, the obvious drawback is the risk that will consequently be shouldered by individual savers, such as those with pension funds. In addition, this measure would send contradictory signals to banks already under pressure from the government to maintain a capital buffer that can cushion savers against losses, and would potentially perversely encourage the same kind of high-risk behaviour that led to the credit crisis.

The Bank of England has been considering a variety of options to tackle the dry-up of lending in the UK, of which this idea is only one. Other possibilities include extending the Funding for Lending scheme further (offering banks low interest loans that it can pass on to borrowers) or continuing with the quantitative easing strategy (injecting money into the economy to stimulate growth).

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