Speaking at an online event held by the Scottish Chambers of Commerce today, Bailey said subzero rates would hurt banks’ ability to lend to companies as it would complicate the rates of return.
He also said it was not easy to draw parallels with low interest rates in the UK and the effect similar moves had on other countries in Europe despite numerous suggestions from BoE policymakers that it was a tool they were prepared to use.
Bailey added: “In simple economics and maths terms, there is nothing to stop it at all. However, there are a lot of issues with it.”
His comments follow a speech from Monetary Policy Committee member Silvana Tenreyro at the UWE Bristol webinar yesterday, who said although the base rate had never gone below zero in the UK, there were “real world” examples of it working in countries abroad.
She also said negative interest rates could boost UK growth and inflation.
Tenreyro continued to say that as lending conditions had loosened as a result of the current record low rate of 0.1 per cent rate, a further cut could provide more stimulus as it could give banks more to lend which could encourage lending to riskier borrowers.
Wider economy
Bailey suggested the unemployment rate in the UK was worse than official records stated and said while the current rate was 4.9 per cent, the true figure was likely around 6.5 per cent.
However, he predicted that because the government had extended its job protection scheme, the unemployment rate would not peak at seven to eight per cent as previously forecast by the Bank of England.
Bailey also said although he had heard anecdotal accounts of negative effects on the economy caused by Brexit, it was too soon to say whether the disruption would last.
With regards to the current wave of Covid-19 and how it would impact the UK economy, he added: “[We’re] in a very difficult period at the moment and there’s no question that it’s going to delay, probably, the trajectory [of recovery].”
