Danish banks are already offering home loans with a negative figure, and the UK could follow suit if the Bank of England cuts its base rate from 0.1% to less than zero.
A negative rate mortgage means that the interest bill is credited to the borrower’s account rather than debited, reducing the amount borrowed over time. This contrasts with loans offered by banks and building societies 25 years ago, when the interest rate hovered between 5% and 8% and often meant paying back twice as much over the life of the loan.
Tenreyro said it was clear that to support the recovery from the Covid-19 crisis, struggling households and businesses needed cheaper loans. She added that concerns about the impact on the financial system of offering negative interest rates were disappearing.
She said a close scrutiny by the central bank had shown that lenders can thrive and the financial system can cope.
In an interview with the Sunday Telegraph, she said: “We have been discussing our toolkit in recent months, particularly the effectiveness of negative rates in the current environment,” she said. “The evidence is encouraging.”
Many of his colleagues, including Governor Andrew Bailey and Chief Economist Andy Haldane have warned against rushing to subsidize borrowing with cheap central bank funds.
Haldane argued that the economy is recovering at a faster pace than expected and that the BoE should keep any further stimulus in reserve.
Last week, Bailey sought to quell speculation that the MPC would cut interest rates, saying the use of negative rates around the world had produced “mixed” results and the effectiveness of the policy depended on the timing of the move and the structure of the country. banking system.
Tenreyro, who argued that Haldane’s confidence in the economic recovery was misplaced, also appeared to disagree with Bailey. She said: “Banks have adapted well – their profitability has increased with negative rates, largely because write-downs and provisions for losses have declined with the revival of activity and rising asset prices.
“There has been almost total pass-through of negative rates to lending rates in most countries.”
Several of Tenreyro’s colleagues at the MPC recently gave speeches claiming that the UK economy was in danger of a slow recovery without further efforts by the central bank to reduce borrowing costs.
Former city economists Michael Saunders and Gertjan Vlieghe, Imperial College professor Jonathan Haskell and former treasury deputy governor Dave Ramsden have warned of the risks to the economy of a slow recovery .
Bank of England officials conducted a spring and summer survey on the impact of the central bank’s negative rate offer. They reported their findings to the MPC last month, with a final report expected in December, suggesting the policy could be adopted as early as the spring of next year.
The central bank has pumped an additional £ 200bn into the financial system since February, bringing its total quantitative easing stimulus package to £ 745bn.
A mini-boom in the real estate market over the summer has faded in recent weeks, according to the latest surveys of real estate agents. Some experts believe the number of deals and prices will start to drop before the end of the year as local lockdowns hit buyers’ appetites for larger loans.