Interest rates could be slashed to zero to battle deflation
BRITAIN’S record-low interest rates could fall even further, Bank of England policymaker Andy Haldane said yesterday, arguing that a shock rate cut could help boost inflation and growth.
Rates have been held at 0.5 per cent for the past six years, with the authorities worried that cutting it further would devastate banks by crushing returns on loans.
But now banks are stronger, and Haldane believes they will be able to withstand lower rates.
“A case can be made for policy easing today. With the lower bound set at zero, the optimal path for interest rates would involve them being cut in the short-run towards zero for around a year, before then roughly following the market yield curve,” monetary policy committee member Haldane told an audience in Rutland.
That would result in rates falling at first, but Haldane believes the resulting rise in inflation would lead to rates ultimately rising more quickly than if rates are held at 0.5 per cent for the whole period.
Sterling dropped on his speech, as markets priced in the chance of lower interest rates.