Negative rates have ‘significant benefits', says Haldane

Bank of England’s chief economist says digital currency could ease the move to going below zero

A  widely used digital currency could pave the way for negative interest rates by making it harder to hide cash under the mattress, the Bank of England's chief economist has said.

Andy Haldane said that if most families use virtual money instead of notes and coins, and rates go below zero, customers would find it impossible to hoard cash rather than depositing it in a bank account where they might be charged a fee.

The Bank has repeatedly warned consumers against embracing high-risk online money such as bitcoin where values swing wildly, but is also considering developing an alternative over which it has control.

Mr Haldane said central banks’ inability to effectively go negative risks harming the economy by keeping the rate of interest too high, and so it could be useful to find a new way to further loosen.

He said: “One of the most pressing issues for monetary policymakers today is the zero (or close to zero) lower bound (ZLB) on interest rates.

“At root, the ZLB arises from a technological constraint on the ability to pay or receive interest on physical cash, whether positive or negative.

"In principle, a widely used digital currency could mitigate, if not eliminate, that technological constraint by enabling interest rates to be levied on retail monetary assets.”

This would rely on people largely shifting to digital cash instead of banknotes.

It would inflict pain on savers - with HSBC already warning that it may have to start charging for current accounts in some countries - but Mr Haldane said the wider economy would benefit.

Negative rates mean banks are charged for holding onto deposits instead of lending them out, and are designed to boost the flow of credit.

Mr Haldane warned interest rates are already so low that central banks may be unable to set policy as they would prefer as much as 40pc of the time, to avoid straying below zero.

He said the economy faces “significant shortfalls” relative to potential output as a result, and added:
“The potential macro-economic benefits of easing the ZLB constraint appear to be significant."

The chief economist suggested he does not expect rates to go negative for now, but that the topic is up for discussion.

Speaking at a conference run by lobby group TheCityUK, he said: “To be clear, what I am discussing here is a structural shift in the monetary regime and carries no implications for the costs and benefits of negative interest rates in the shorter-term.

"And these costs can of course be mitigated in others ways, including through unconventional monetary policy tools and activist fiscal policy.

“Nonetheless, I believe it is important these potentially large macro-economic benefits of a digital currency are explored when evaluating the case for a new monetary order.”

Digital currencies could also help lower the cost of financial payments, particularly to the benefit of small businesses, he said.

Mr Haldane also hailed a “materially brighter” outlook for the economy next year, despite the second wave of the pandemic.

It comes after the emergence of two successful vaccines which could bring a quicker end to the Covid crisis.