BoE weighs rate cut on reserves to stimulate lending
September 16, 2009
The Bank of England (BoE) could cut the interest rate it pays banks holding reserves with it to help nurture what the bank predicts will be a gradual economic recovery, governor Mervyn King said yesterday.
The economy had probably started growing again but inflation risks were still to the downside, King told a parliamentary committee.
He also defended the work of the bank's monetary policy committee after criticism from former member David Blanchflower, who said that King had dominated it with his hawkish views on interest rates.
British interest rate futures rallied and sterling fell yesterday after King floated the idea of following Sweden and cutting the rate of interest it pays on commercial bank deposits in order to encourage more lending.
In Sweden the central bank has reduced the deposit rate for banks holding reserves with it to minus 0.25 percent, encouraging the banks to keep money flowing in the markets, rather than held at the central bank with a negative interest rate.
"Of course people have talked about whether it would be sensible to reduce the rate at which... reserves are remunerated and it is something which we are looking at," King told parliament's treasury committee.
There has been concern the extra £175 billion (R2.2 trillion) being pumped into the economy through the BoE's quantitative easing programme is being hoarded by banks rather than finding its way to struggling businesses. - Reuters
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