Bank of England could set NEGATIVE interest rate: Move would mean that rather than earning money, savers would be charged for keeping their cash in the bank

  • Chief economist speaks out, citing ultra low inflation and minimal growth
  • US policy makers have decided not to raise rates thanks to China turmoil
  • He also suggested raising the inflation target from 2 per cent to 4 per cent 

By Mark Shapland For This Is Money

Published: 09:50 EST, 18 September 2015 | Updated: 19:41 EST, 18 September 2015

Interest rates may need to be slashed below zero to stave off another economic downturn, a senior Bank of England official warned yesterday.

Such a move would mean that rather than earning on money left in the bank savers would be charged – as the rate acts as a tax on savings.

Chief economist Andy Haldane said Britain could require 'radical' action in order to keep the recovery on track, including further cuts in interest rates and even, in theory, the abolition of cash.

His comments put him at odds with Bank of England Governor Mark Carney, who this week hinted rates could rise in the coming months. 

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Unconventional: Andy Haldane believes interest rates should be cut further, going against conventional wisdom that a rise is just around the corner

Unconventional: Andy Haldane believes interest rates should be cut further, going against conventional wisdom that a rise is just around the corner

The clash between the Governor and one of his lieutenants muddies the outlook for interest rates at a crucial time for borrowers, savers and businesses.

Rates have been frozen at a historic low of 0.5 per cent since March 2009, resulting in ultra-cheap mortgages. But the move has hammered savers, who have suffered more than six years of paltry returns.

Central banks traditionally cut interest rates to discourage saving and encourage borrowing and spending – so boosting the economy during a slowdown.

High street banks are persuaded to lend more because they are charged when they lodge cash at the central bank. But any attempt to bring in negative rates could see savers withdraw their money from banks and hoard it under the mattress to avoid charges.

In a speech to business leaders in Northern Ireland yesterday, Mr Haldane – who has been tipped as a potential successor to Mr Carney – said that one way to stop hoarding would be to replace cash with a state-issued digital currency that would be subject to negative interest rates. By tempting people to spend this would, in theory, boost the economy.

Negative interest rates would not mean those with mortgages would get paid by their bank. Although tracker mortgages follow the Bank's rate, most have a minimum level they will track to.

At odds: Andy Haldane disagrees with his boss Mark Carney that interest rates should rise

At odds: Andy Haldane disagrees with his boss Mark Carney that interest rates should rise

HOW A NEGATIVE INTEREST RATE MEANS WE'D HAVE TO PAY THE BANK TO SAVE OUR CASH

When interest rates are cut below zero, they go into negative territory.

Currently rates are at 0.5 per cent. But in theory they could be cut towards, or below, zero – for example to minus 0.5 per cent.

This would effectively mean banks, businesses and people are charged to save cash.

A bank that leaves money parked at the Bank of England would have to pay interest instead of being paid interest.

And a saver who leaves money at the bank would pay money to do so rather than earning money through interest.

The idea behind negative interest rates is to get banks to lend and businesses and people to borrow and spend – therefore boosting economic growth.

But while it may encourage banks to lend, businesses and savers could also withdraw their money from banks and hoard it somewhere else. By doing so they would avoid paying interest.

Negative interest rates would not mean borrowers with mortgages would get money back from their bank, however. Most tracker mortgages, which are held by millions of borrowers and should slavishly follow the Bank of England rate, have a minimum level well above the this.

Mr Carney has been eager to predict higher rates as the economy recovers and wages rise. Appearing before the Treasury select committee this week, he said 'the next move in interest rates is likely to be up' to ensure inflation does not rise above the 2 per cent target.

He added that 'it may be appropriate' to raise rates 'around the turn of this year' if the economy and wages continue to recover.

But Mr Haldane yesterday told Portadown Chamber of Commerce: 'The balance of risks to UK growth and to UK inflation is skewed squarely and significantly to the downside.

'Against that backdrop, the case for raising UK interest rates in the current environment is, for me, some way from being made.'

He added there 'could be a need' to cut interest rates rather than raise them 'as the next step to support UK growth and return inflation to target'. 

But Howard Archer, chief UK economist at the research group IHS Global Insight, said Mr Haldane's stance 'looks isolated', adding: 'The question still seems very much one of when will the Bank of England start to inch interest rates up.'

Britain's productivity levels have fallen to the lowest below other G7 countries since records began more than two decades ago.

Figures for 2014 show the UK's output per hour worked and output per worker were both 20 percentage points below the average for advanced economies last year, said the Office for National Statistics.

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