Bank considers new measures to stop lenders

Bank considers new measures to stop lenders hoarding

The Bank of England may introduce negative interest rates for the first time in British history this week, economists said.

By Amy Wilson
Telegraph, 06 Sep 2009

Setting its stall: the Bank of England is moving to stop institutions keeping the extra money created by quantitative easing and, instead, lend more

City analysts suspect the Bank may consider cutting the interest rate paid to banks on their reserves with the central bank in an effort to stop institutions hoarding the extra money created by quantitative easing and increase lending. Some think it may even introduce a charge for holding a certain amount of cash with the Bank.

After last month's surprise £50bn increase in the quantitative easing (QE) target, economists expect the Monetary Policy Committee to keep interest rates unchanged at 0.5pc and hold the level of QE at Thursday's September meeting.

But with lending still sluggish, economists suspect a lower or negative interest rate on reserves held with the Bank of England – as proposed by former MPC member Charles Goodhart – could be introduced in the coming months.

"By holding the bank rate steady but lowering the remuneration on reserves, the central bank will encourage banks to diversify their assets and simultaneously maintain borrowing costs for households," said UBS economist Amit Kara.

They expect another £25bn increase in QE before the end of the year, most likely at the November meeting.

Members of the shadow MPC voted unanimously to keep interest rates at 0.5pc, on the basis that QE is the most useful monetary policy tool available.