A Bank of England policymaker has become the latest to back the case for negative interest rates after warning that more action is likely to be needed as joblessness is set to soar.
Monetary Policy Committee (MPC) member Gertjan Vlieghe said below-zero rates would offer some vital “headroom” for policymakers as quantitative easing (QE) becomes a less powerful tool to help the economy through the pandemic.
In an online speech, Mr Vlieghe also said he believes that the potential side-effects of negative rates are unlikely to outweigh the benefits to the UK economy.
He said: “My own view is that the risk that negative rates end up being counter-productive to the aims of monetary policy is low.
“Since it has not been tried in the UK, there is uncertainty about this judgment, and the MPC is not at a point yet when it can reach a conclusion on this issue.
“But, given how low short-term and long-term interest rates already are, headroom for monetary policy is limited, and we must consider ways to extend that headroom.”
He joins fellow MPC members Silvana Tenreyro and Jonathan Haskel, who have both said evidence from the European Central Bank suggests that below-zero rates could boost lending and the economy.
Mr Vlieghe’s support for considering negative rates came as he warned that there is a “tremendous challenge ahead” for the economy, which is facing joblessness on a far worse-than-expected scale.
“In my view, the outlook for monetary policy is skewed towards adding further stimulus,” he said.
“Given that virus prevalence has been increasing again recently, it is likely to weigh more heavily on economic activity.
“Indeed, it appears that the downside risks to the economic outlook are starting to materialise.”
The Bank is widely expected to launch more QE at its next meeting in November, with some economists pencilling in another £100 billion, on top of the existing £745 billion asset-buying programme.
But Mr Vlieghe said QE is becoming less effective to spur on economic growth.
He said: “A key channel through which QE works is by affecting expected future real interest rates, which are already very low.
“These arguments suggest QE is probably less potent now than in March, at the height of market disruption and uncertainty.”
There have been signs of a rift emerging on the MPC over negative rates.
Governor Andrew Bailey has been looking to cool speculation over an imminent move to slash rates into negative territory after the Bank revealed in September that it is looking at how the policy tool could be put into practice.
The Bank’s chief economist, Andy Haldane, has also recently said none of the conditions that would justify sub-zero rates have been met.