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Negative base rate ‘remains an option’ – MPC’s Bean

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  • 25/06/2013
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Reducing the base rate from its current historical low of 0.5% into negative territory 'remains an option' for the Bank of England's Monetary Policy Committee (MPC), deputy governor Charles Bean has said.

The move would not necessarily lead to immediate reductions for retail interest rates or deposit rates, though that would naturally occur should the official rate remain below zero for some time, Bean said in a note to Treasury Select Committee (TSC) chairman Andrew Tyrie.

Tyrie had requested details on the prospect of negative rates after the issue was raised by then-deputy governor Paul Tucker at a TSC hearing with the MPC in February.

Bean pointed out that the MPC had always had the power to set negative interest rates – a move which would see commercial banks pay the BoE for holding reserves, rather than the other way round.

That prospect would encourage banks to substitute out of reserves into alternative assets which could, in turn, lead to a reduction in savings rates.

Bean noted this would likely be met with considerable customer resistance.

Bean said the MPC believes that further asset purchases and targeted policies to restore the functioning of the monetary transmission mechanism, such as the Funding for Lending Scheme, represent more reliable tools for stimulating aggregate demand than a further reduction in the base rate.

“But,” he said, “a reduction, including to below zero, remains an option which the MPC will keep under review lest circumstances change in the future.”

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