ADVERTISEMENT

Ex-BOE’s Mervyn King Warns of Cash Hoarding If Rates Cut Below Zero

Ex-BOE’s Mervyn King Warns of Cash Hoarding If Rates Cut Below Zero

Former Bank of England Governor Mervyn King said there’s a risk people will pull their money out of their accounts to stash it at home if interest rates are cut below zero.

His warning comes as the central bank assesses whether U.K. financial institutions can implement negative rates without damaging their business, or whether such a move would backfire by depressing consumer confidence.

King said negative rates need to be passed through to savers to work.

Ex-BOE’s Mervyn King Warns of Cash Hoarding If Rates Cut Below Zero

“Once that happens, I think you should expect to see a long line of customers seeking to take their cash out of the bank and keep it under the mattress, or at least in a new home safe,” King said on Bloomberg Television on Monday. “I don’t think that’s a politically attractive prospect at all.”

Current Governor Andrew Bailey has said subzero rates aren’t imminent, but policy makers want to have the tool ready in case such a drastic move is ever needed.

The European Central Bank implemented the policy in 2014 and banks in the euro zone have largely avoided passing them on to retail depositors. The consequence is that while there is no widespread evidence of cash hoarding, the profitability of lenders has been squeezed.

King also said a bigger question is the continued reliance on monetary policy as a cure for economic weakness, when much of the problem relates to broader structural issues that require other measures.

“Somebody coming from outside to look at the world economy as it is today would say: ‘You’ve had the most expansionary monetary policy any one has ever seen for 10 years and yet growth was still very slow’,” he said. “We need to look elsewhere. It’s other policy issues and policy tools, in particular the need to reallocate resources from one part of the economy to another.”

©2020 Bloomberg L.P.