In the News

Monetary policy: are negative interest rates on the horizon?

Ollie Gardner

9th February 2021

The Bank of England's move to instruct high street banks to prepare for the possibility of negative interest rates indicates that more expansionary monetary policy may be yet to come.

This BBC article gives a great overview of what negative interest rates are and what they would mean for the UK economy.

The basic aim of negative interest rates is to discourage banks from holding deposits at the Bank of England (for which they would be charged) in order to stimulate greater lending to households and firms in the economy. This should lead to a boost in consumption and investment, therefore causing a rightward shift of the aggregate demand curve.

However, the article below explains why negative interest rates may not work in practice for the UK economy - as banks may make mortgages more expensive to protect their profitability. If banks are reluctant to pass negative interest rates onto ordinary savers (which has been the case in countries such as Switzerland) and they lowered the rates they charged borrowers, this would reduce their profitability. This is because the interest rate spread between what they charge borrowers and pay savers, which is one of the key ways commercial banks make money, would be reduced.

Ollie Gardner

Ollie is a new economics teacher at an academically selective school having previously worked in the healthcare technology industry.

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