In the midst of his testimony to the treasury select committee, Bank of England deputy governor Paul Tucker gave a suggestion that Britain might be considering some unorthodox monetary policy of its own:
I hope we’ll think about whether there are constraints to setting negative interest rates. This would be an extraordinary thing to do and it needs to be thought through very carefully.
Such a move would be unlikely to affect the Bank’s base rate. While we still have cash, that rate is pretty firmly stuck at the zero lower bound, because savers will always be able to withdraw savings as cash and horde it that way, safely out of reach of the banks trying to charge interest on their money.
Instead, it would be the rate paid on the Bank’s overnight deposits which would be hit. This is the sum the Bank pays to other banks which leave their money with the Bank of England. It’s basically the interest rate the Bank charges when it’s actually acting like a bank. It can get away with it because, while withdrawing your savings and stuffing them under a pillow may work for you or I, it’s less of an option for Halifax or HSBC.
The Financial Times‘ David Keohane thinks that the statements, which echo suggestions in the minutes of the monetary policy committee released last week, could be an attempt to talk down the value of the pound. Keohane writes:
Throwing around the negative interest rates idea has become very trendy all of a sudden with Draghi, Praet and Constancio weighing in and, we’d argue, using the threat to substitute for policy impotence.
Was Bank of England deputy governor Paul Tucker doing the same thing? Using a jedi-trick to talk down sterling perchance?
Of course, as Keohane points out, if that was the aim, it didn’t do a whole lot of good. The effect of Tucker’s words is almost lost in the general volatility of the market today:
Maybe the Bank of England is just feeling a little bit jealous of its Japanese counterpart? After all, they’re gearing up to do all kinds of cool new things with monetary policy — Foreign bond purchases! Stock exchange targeting! Capital stock nationalisation using the profits of quantitative easing! — while we’re stuck with boring old open market policy, where a chart from eight months ago is still accurate.
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