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Coronavirus: Bank of England issues warning on challenges of negative interest rates

·1-min read
Bank of England Governor Andrew Bailey poses for a photograph on the first day of his new role at the central bank in London on March 16, 2020. (Photo by Tolga AKMEN / POOL / AFP) (Photo by TOLGA AKMEN/POOL/AFP via Getty Images)
Bank of England Governor Andrew Bailey. Photo: TOLGA AKMEN/POOL/AFP via Getty Images

Bank of England (BOE) governor Andrew Bailey has issued a warning to lenders on the potential challenges of negative interest rates.

According to a report in The Sunday Times, the a letter sent to lenders said negative rates are "one of the potential tools under active review" by the central bank due to the economic fallout of the coronavirus.

This could come into play if the monetary policy committee (MPC) decides more stimulus is needed to hit the bank’s 2% inflation target.

If rates turn negative, this would be the first time this has happened in the institution’s history.

In theory negative rates make spending more attractive than saving thus stimulating economic activity.

Rates are already at a record low, having been cut to 0.1% in response to the economic fallout from the coronavirus.

READ MORE: Hospitality sector forecasts £73bn loss

The bank is pulling out the stops to build a buffer for the economy. On 18 June, after much speculation about moves the MPC would make to boost the economy, it opted for £100bn ($124.8bn) in quantitive easing (QE).

The BOE has so far pumped £745bn in QE measures into the economy.

Bailey has previously said that negative rates were an option for the BOE, but that the issue was complex and taking borrowing costs below zero was not in any way imminent.

The Sunday Times report stated that the governor has previously made clear that “every tool they have is on the table.”

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