Mark Carney, the Bank of England governor, has said that the central bank could cut interest rates to zero, but insists that rates will not be dragged into negative territory, even in the event of an economic downturn.
Responding to questions from MPs on the Treasury select committee, the governor said that the global economy had entered a period of low growth and low interest rates and could be susceptible to financial shocks.
If the economy did need additional stimulus, there were many things that the bank could do, Carney said, such as cutting interest rates to zero (from the current 0.5% rate), or buying more assets through quantitative easing.
While previously asserting that the central bank was on a rate-rise agenda, rather than looking to cut rates, Carney is now suggesting that the bank could launch a range of new stimulus measures.
“We could cut interest rates towards zero. We could engage in additional asset purchases, including a variety of assets.
“We could also provide a perspective where we could adjust our policy horizon. We could shorten our policy horizon over which we wanted to return inflation to target.”
He added that Threadneedle Street had “no intention” and “no interest” in implementing negative interest rates and that to protect the profitability of the UK’s banks and building societies, the monetary policy committee (MPC) would avoid cutting the current base rate of 0.5% to below zero.
“We have other options and would take very seriously the impact of negative interest rates on financial services and building societies especially.
“The focus of our monetary stimulus is concentrated domestically; concentrating policy measures externally is far less productive than domestic monetary stimulus,”
Bank of England chief economist Andy Haldane has suggested previously that there may be a need to move to negative interest rates.
He went as far as to say there may be a need to abolish cash too, when speaking at the Portadown Chamber of Commerce in Northern Ireland.
When questioned about future rates rises, Carney said that while the UK domestic economy is positive, this must be balanced with an overview of the world economy and disappointing signs from abroad.
“We must weigh the two up and we’re not taking a policy decision today,”
Jeni Browne, Head of Residential and Buy to Let Lending said:
"This is not the first time that there has been talk of Bank Rate being reduced further and I am sure over the coming months, talk of it being increased will also come up again.
As landlords face uncertainty around both tax changes and rate movements, at Mortgages for Business we still believe that with mortgage rates being at an all time low, it is the opportune time for borrowers to lock into fixed pricing, to give them some certainty in a changing market."