Liam Halligan

The Bank of Wonderland

Central banks’ latest wheeze may not boost growth, but it will have plenty of other consequences

What should we think about negative interest rates? What kind of Alice in Wonderland world are we living in when companies and households are paid to borrow and charged if they save?

Seemingly crazy, negative interest rates are spreading nonetheless. Implemented by central banks in Europe, Japan and elsewhere, they now apply in countries accounting for a quarter of the global economy. Should we be worried? Could we see negative rates in Britain?

Earlier this month, the Bank of England cut interest rates for the first time in seven years, from 0.5 per cent to a new record low of 0.25 per cent. Quantitative easing was also restarted, with the Bank set to purchase £60 billion of bonds with newly created money over the next six months, on top of £375 billion of QE since March 2009. Billed as a response to the UK’s ‘Brexit shock’, the Bank’s bold move has renewed speculation that the UK could soon go even further. Negative rates will be the talk of this weekend’s Jackson Hole summit, the annual pow-wow of leading central bankers.

Eight years on from the onset of the financial crisis and, despite huge bouts of money-printing and ultra-low rates across much of the western world, the global economy remains sluggish. Searching for new ways to boost growth, some central banks have stepped ‘through the looking glass’, setting interest rates below zero. The European Central Bank went first in 2014, followed by Denmark, Sweden, Switzerland and, earlier this year, Japan. Private-sector banks in these countries must now pay the central bank to keep their money on reserve. Investors in government bonds are similarly paying the Japanese, German and Swiss governments for the privilege of lending to them — another example of topsy-turvy economics.

The idea is that, by penalising cash on deposit, negative rates will jolt spending and encourage banks to extend loans — thereby boosting growth.

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