Negative interest rates mooted to boost UK economy

Bank of England deputy governor Paul Tucker has mooted the idea of negative interest rates as policymakers look for measures to help boost the beleaguered UK economy.

Tucker told MPs that charging commercial banks for the money they held in reserve was a "pretty radical idea" to encourage, cautioning however that it was not "the answer to the universe".

Currently banks in the UK adhere to a base rate of 0.5 per cent on reserves. However, there is growing disquiet over measures such as cheap financing provided to banks through the Funding for Lending Scheme (FLS), that does not seem to be reach small and medium-sized enterprises as loans.

Though negative interest rates had been tried in Denmark and Sweden economists remained sceptical that the policy had worked.

According to Samuel Tombs, economist at Capital Economics, negative interest rates would see a further cut in the amount paid to savers. He added banks could increase charges to borrowers in a bid to recoup lost interest.

According to the chairman of the Treasury Committee, Andrew Tyrie, the lack of lending to SMEs was inhibiting economic growth in the UK.