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Bank of England: UK could ditch cash and slash rates below zero
Bank of England's chief economist says we may need to cut interest rates even further and adopt a digital currency like Bitcoin.
The Bank of England’s next move may not be to raise interest rates but to cut them below zero, its chief economist has suggested.
With global markets reeling today after the Federal Reserve’s decision to keep US interest rates at their six-year, post-crisis low, Andy Haldane said the challenge facing central banks was how to stimulate economies when interest rates had been slashed to zero.
In a provocative speech addressing the future of money as well as the future of monetary policy, Haldane said policymakers had to recognise the powerful, long-term forces that continued to drive down global interest rates.
Haldane warned that a recent softening in UK employment and other economic dates were ‘straws in the wind to suggest slowing growth into the second half of the year’.
With a strong pound hitting exports while the country was buffeted by the slowdown in China and emerging markets, Haldane said the case for a rise in UK interest rates had not been made.
Haldane, a leading ‘dove’ on the Bank’s monetary policy committee, pitched himself against the Bank's governor Mark Carney, who has said a rate rise will come 'into focus' at the turn of the year.
‘In my view, the balance of risks to UK growth, and to UK inflation at the two-year horizon, is skewed squarely and significantly to the downside,’ Haldane said.
He explained that although the Bank of England and its counterparts in the US, Japan and Europe had injected $5 trillion of new money with quantitative easing since the financial crisis, further radical actions might be necessary in the face of profound demographic, technological and economic changes.
‘If global real interest rates are persistently lower, central banks may then need to think imaginatively about how to deal on a more durable basis with the technological constraint imposed by the zero lower bound on interest rates.
‘That may require a rethink, a fairly fundamental one, of a number of current central bank practices,’ he said.
One idea, Haldane told an audience of business owners in Northern Ireland, could be to scrap cash and adopt a state-issued digital currency like Bitcoin.
Although widely reviled as the currency for drug dealers and criminals, Haldane said Bitcoin’s distributed payment technology had ‘real potential’.
One advantage of electronic money, he explained, was that it enabled central banks to impose negative interest rates which were impossible with paper money.
This could give policy makers the ‘wriggle room’ they needed to cope with a downturn when interest rates were already close to zero. History shows that central banks need to cut interest rates by 3-5% during recessions, suggesting that the UK would need a -2.5% rate if it hit a slump now.
Haldane stressed that this was blue-sky thinking but that it was part of the Bank’s long-term policy research.
He added that the Bitcoin idea was better than the alternatives which, he said, could include doubling the Bank’s inflation target to 4% or making QE – popularly dubbed ‘money printing’ – as a permanent feature of its operations.
Both would risk macro-economic stability and undermine public trust in the Bank of England, he said.
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