Negative interest rates are “worth a shot”, says the economist Danny Blanchflower, who sat on the Bank of England’s Monetary Policy Committee for three years under the last Labour government.
If he were still a member of the committee he would consider voting for them, Blanchflower wrote in The Guardian on 27 July.
Now an academic at Dartmouth College in the US, he noted that the MPC has never cut interest rates below 0.5 percent. But at its 4 August meeting the committee is likely to cut rates to 0.25 percent and maybe even to zero.
Negative rates are already being charged by the European Central Bank, along with the central banks of Japan, Denmark, Switzerland, Sweden and Hungary.
“Lower rates encourage business investment and consumer spending and the hope is that there is a nice continuum from positive rates to small negatives,” wrote Blanchflower (bylined under his real name David rather than his footballer-inspired nickname).
“The concern… is that negative rates would have harmful consequences on banks’ profitability and the supply of credit. We don’t know if they will work or the exact transmission mechanism they work through.
“But I would vote for them if the data worsened markedly; they are worth a shot.”
Noting that economists used to think that zero was the lower limit for interest rates, he speculated that they could fall for a short time to minus 2 percent or even lower to give a short, sharp shock.
“The vote to leave the EU has been a nasty negative shock to the UK economy that is going to lower living standards and cause much pain and suffering,” he said.
NatWest bank has already warned its business clients that negative interest rates are possible.
It told them: “Global interest rates remain at very low levels and in some markets are currently negative. Dependent on future market conditions, this could result in us charging interest on credit balances.”
When rates go negative, clients are charged a fee for keeping their money in a bank.