Lenders, negative interest rates and mortgage activity
Published: 6 March 2013 | Author: Bernard Clarke
A recent suggestion by deputy governor Paul Tucker that the Bank of England could consider paying a negative interest rate on deposits lodged with it by high street lenders could have implications for the mortgage market, if enacted. Although the Bank remains unlikely to adopt such a policy any time soon, we agree with commentators that it could put downward pressure on savings rates, and make conditions more challenging for those lenders that rely on retail deposits to fund mortgage activity.
Mr Tucker made his comments about negative interest rates when addressing MPs on the Treasury select committee last week. "I hope that we will think about the constraints of setting negative interest rates," he said. "This would be an extraordinary thing to do and it needs to be thought through carefully."
The deputy governor argued that charging banks and building societies interest on deposits they held at the Bank – in effect, imposing a negative interest rate – would incentivise them to reduce those deposits, and increase lending to small and medium-sized businesses.
Mr Tucker’s comments came a few days before publication earlier this week of the most recent data from the Bank’s funding for lending (FLS) initiative, showing that lenders had increased drawdowns under the scheme but that there had been a reduction in overall net lending.
But although some commentators were disappointed by the FLS data, the Bank’s executive director for markets, Paul Fisher, pointed out that the scheme had contributed to "the beginnings of a revival in mortgage activity which is visible in approvals data." He also said the trend of increased mortgage activity was supported by the Bank’s business contacts throughout the country.
While there was a decline in net lending in the fourth quarter of 2012, the FLS had made loans available at a lower cost than before, Mr Fisher said. It was still early for much extra money to have flowed from the application stage into actual loans. He also referred to earlier plans showing that aggregate lending would have been most likely to fall without the FLS and said he would not expect this to reverse until he began to see data from 2013, at the earliest.