Tuesday 08 March 2016 5:05 pm

Negative interest rates come with risks, warns Bank of England’s Martin Weale

A Bank of England official has warned there are risks of negative side-effects if interest rates are slashed below zero.

Negative interest rates are in place in the UK’s biggest export market, the Eurozone, as well as several other countries.

But Martin Weale, a member of the Bank of England's nine-strong monetary policy committee, told an audience at Nottingham University that negative interest rates “probably do provide some support, but the extent of this depends on how banks behave, and whether they are able to pass on the full amount of the rate reduction to borrowers”

“There is a risk of adverse side-effects and it would be wrong to introduce negative interest rates without being confident that these side-effects were going to be small.”

“Equally, measures designed to protect the domestic economy from the effects of negative interest rates mean that the policy becomes close to one of beggar-my-neighbour exchange rate management.”

Weale favoured the policy of quantitative easing and said its effectiveness removes some of the risk in hiking interest rates.

“There is less reason to delay policy tightening if you are confident that you have a means of providing material further support should it be needed,” he said.

“This has been one reason why I have perhaps been closer to supporting a rate increase than some of my colleagues over the past couple of years.”

“While it is clear that the effects [of QE] cannot be estimated with any real degree of precision, I do now think that the policy was highly effective."

“Furthermore, it seems to me that the second and third rounds of asset purchases were as effective as the first round.”

Weale also said the purchases could be extended to private sector assets. The Bank bought a small amount of private sector debt early on in the crisis, while the US Federal Reserve bought very large amounts.