INTEREST RATES [in the UK] COULD BE CUT BELOW ZERO TO KICK START THE ECONOMY [BUT WHAT ABOUT YOUR SAVINGS?]

This is Money 21 May 2020 - Lucy White for The Daily Mail

Bank of England Governor Andrew Bailey has hinted that interest rates could be cut below zero to kick start the economy, telling MPs it would be ‘foolish’ to rule it out.

Bailey has repeatedly batted away the prospect of negative interest rates, describing them as not a ‘plausible tool’ when he took the helm in March.

But as the pandemic dragged inflation to a four-year low and desperate investors agreed for the first time to pay to lend money to the Government, he said that such a radical move is now a possibility.

Giving evidence to the House of Commons Treasury committee he said: ‘I have changed my position.

‘In this situation we have to review tools as a matter of regularity, we have to keep them under consideration. I say that in the spirit of ruling nothing out and ruling nothing in.’

© Provided by This Is Money Turnaround: Bank of England boss Andrew Bailey yesterday told MPs he had 'changed his position' on negative interest rates and that it would be 'foolish' to rule it out

Negative interest rates, which have been deployed by the European Central Bank and Japan, seek to boost the economy.

They mean that anyone wanting to deposit their money with the Bank of England, such as high street banks, would have to pay for the privilege. This is designed to encourage banks to lend to firms and households.

But the policy is controversial, and some worry it has limited effectiveness in actually encouraging spending and investment over the long-term. Others worry it discourages companies from holding a cash buffer to see them through future crises.

For households, it would mean they would earn little to nothing on any savings. 

But pressure is growing on policymakers at the Bank to push interest rates below their current record-low level of 0.1 per cent, as data showed yesterday that inflation had almost halved from 1.5 per cent in March to a four-year low of 0.8 per cent in April.

Although lower inflation is good news for cash-strapped households, it can eventually suppress economic growth and prevent wage growth. 

The Bank has an inflation target of 2 per cent, designed to keep the economy growing at a steady pace.

But as the lockdown and falling fuel prices have stymied spending, economists expect inflation to remain low for some time.

This sentiment was echoed yesterday when the UK sold bonds with a negative yield for the first time. 

The Government raised £3.8billion in the sale of three-year government bonds to deal with the crisis.

But their yield – how much investors will get in interest payments relative to the price of the bond – was minus-0.003 per cent, according to the Debt Management Office, a Government agency.

This means investors are paying to lend to the Government, reflecting their desperation to keep money in assets seen as safe.

The Bank is expected to boost its stimulus by increasing its £200billion bond-buying programme by £100billion, when the Monetary Policy Committee meets next month. This will inject more money into the economy.

But some economists are suggesting that the Bank should take its base interest rate below 0 per cent, in effect charging customers to deposit their money.