GBP Under Pressure Following Bank Of England Policymaker Tucker?s Call For Negative UK Interest Rates

February 26, 2013 - Written by Minesh Chaudhari

STORY LINK GBP Under Pressure Following Bank Of England Policymaker Tucker?s Call For Negative UK Interest Rates

The Pound has endured a torrid week in the markets so far, following the fall-out from Moody’s AAA UK debt downgrade last Friday. Just when Sterling looked to be recovering its poise, another spanner has been thrown into the works.

The Deputy Bank of England Governor Paul Tucker surprised the markets today by publicly stating that the UK’s central bank should consider introducing negative interest rates. Interest rates of below the zero level would effectively mean that the Bank of England would levy a charge on retail banks who parked their funds overnight with them. The idea of such a charge would be to encourage Britain’s High Street banks to lend more of their balances out to private individuals and domestic SMEs in an attempt to get the under-pressure UK economy moving again.

The move has been tried out in recent times by Switzerland and Sweden’s central banks. On both occasions, the policy proved to be short-lived. The fact that Tucker mooted such a controversial scheme illustrates the difficulties which the BoE’s monetary policy committee face in setting policy. With £375bn already committed to the UK’s controversial Quantitative Easing scheme and inflation projected to touch 3% in the middle part of 2013, more QE would appear to be potentially hazardous due to the potential effect which it may have on domestic price rises. A cut in base rate may be the only realistic option for the Bank.
Up to this point, the Pound has not suffered overly following Tucker’s comments, suggesting that investors are taking his words with a pinch of salt. Any suggestion by other members of the BoE’s nine-man policy committee that they are thinking along the same lines as Tucker could have a more pronounced effect on Sterling.

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