Pushing official short-term interest rates into negative territory would be a powerful signal for companies to spend © NEIL HALL/EPA-EFE/Shutterstock

The Bank of England is eyeing the introduction of negative interest rates for the first time in its 324-year history in a move to help stimulate an economic recovery.

Andrew Bailey, the BoE governor, confirmed negative rates were under “active review”, under questioning from MPs on a day when bond investors accepted that they would need to pay to lend money to the UK government. The interest rate in a gilts auction fell below zero for the first time.

Pushing official short-term interest rates into negative territory would be a powerful signal from the BoE that companies should spend rather than face charges to hold money on deposit in banks.

The new position is a U-turn from just a week ago when Mr Bailey said the BoE was not “planning or contemplating” negative rates amid the coronavirus crisis.

He told the House of Commons Treasury select committee on Wednesday that he had “changed his position a bit”.

Answering a question on the possibility of negative rates, Mr Bailey said “of course, we’re keeping the tools under active review in the current situation”, adding that “we do not rule things out as a matter of principle”.

The governor stressed, however, that the BoE needed time to consider the implications of moving rates below zero before it was likely to take action.

“We’re very keen to observe how the economy responds to the [rate] cuts that we have made,” said Mr Bailey, referring to the reduction in rates to a record low of 0.1 per cent in March.

He added: “We have been looking very carefully at the experience of those other central banks that have used negative rates.”

Many European countries have negative interest rates although it is rare for these to be applied to households.

Mr Bailey said the BoE would study how best to introduce the policy to fit with the UK’s financial system as well as how to communicate such a move.

Andrew Bailey and the Treasury Committee © parliamentlive.tv

Having listened to increasingly positive noises about the policy from other BoE officials in recent days, the government bond market was ahead of the governor on Wednesday, with investors accepting an average interest rate of -0.003 per cent in a three-year gilts auction.

The programme at the central bank to examine negative rates suggests they are more likely to be introduced in the autumn when the economy may require additional stimulus, rather than at the next meeting of the BoE Monetary Policy Committee in June.

Jonathan Haskel, one of the independent members of the MPC, gave an insight into the BoE’s concerns that it might be difficult to get households and companies to start spending again even when the coronavirus lockdown is lifted.

He said that, with many households stretched and likely to be unable to borrow heavily, monetary and fiscal policy would be “incredibly important” in the recovery phase.

Noting that many workers were struggling to secure credit, Mr Haskel said monetary and fiscal policy would be important to “pull us out of this recession because the fortunes of those kinds of workers are going to depend very strongly on aggregate demand in the economy”.

Following chancellor Rishi Sunak’s comments on Tuesday that the economy was unlikely to bounce back quickly from a “severe recession”, BoE officials stressed they now thought the recovery would be slower than they had predicted earlier this month.

Previously, BoE officials outlined a scenario in which there was a strong bounce in growth after the lockdown was lifted.

Ben Broadbent, deputy governor for monetary policy, said the MPC “did feel there were downside risks” compared with its prediction of limited long-term scarring of the economy in its scenario.

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