As Royal Bank of Scotland started charging some clients to hold their cash, its chairman has questioned the effectiveness of ultra-low interest rates and called for a rethink of monetary policy.
From Monday, RBS will charge interest to about 70 customers, such as banks and pension funds, on the cash they place with the state-controlled bank as collateral for trading complex financial products.
It is the first time a bank has imposed charges for sterling holdings since the BoE halved interest rates to a new record low of 0.25% on 4 August and restarted its quantitative easing (QE) programme of government bond purchases. The BoE relaxed monetary policy in an effort to support the economy following the vote to leave the EU by discouraging banks from hoarding cash.
RBS’s chairman, Sir Howard Davies, said that as interest rates get closer to zero the central bank loses control of the effects of monetary policy and leaves itself few options for action iin a recession.
Davies told Bloomberg TV: “When you reach the lower band you don’t know how the economy will respond … We don’t really know what impact QE on the scale it is being implemented is having. I really do think we are entering a period where some of the previous certainties are no longer quite so certain and you really need to rethink the monetary policy framework.”
Davies said he agreed with John Williams, president of the Federal Reserve Bank of San Francisco, who said last week central banks should consider adopting a higher inflation target more suited to lower growth.
“I’m in favour of trying to lift over time the level of inflation we target,” Davies said. The BoE aims to keep inflation rising at a rate of 2%, a target it is likely to exceed as the falling pound pushes up prices even as the economy slows.
Global interest rates are very low and are negative in the eurozone and other jurisdictions as central banks seek to discourage companies and banks from hoarding cash by charging banks to park money with the central bank. The BoE’s governor, Mark Carney, has said he is not a fan of negative interest rates and most economists expect the BoE to cut rates no lower than 0.1%.
RBS, which is 73% owned by the taxpayer, has limited its negative interest rates to deposits required of financial companies to carry out futures trades. RBS said only one of the clients in question was a non-financial company.
Small firms and other larger companies are unaffected but RBS warned its 850,000 business customers last month that it may have to charge them for deposits given persistently low interest rates.
Davies said the letter to business customers was a “bureaucratic exercise” that was misunderstood and that charging financial institutions put RBS in line with some other banks.
“You have to protect yourself against a position where you have a large inflow of cash and you are not charging anything and you have to put it with a central bank that is charging you.”
Negative rates can have unforeseen effects such as pumping up asset prices and putting bank profits under strain. Critics have argued that loose monetary policy is ineffective on its own and that government needs to step in by spending on infrastructure projects.
There is no indication that any high street bank is considering charging retail customers for putting money on deposit. Such a move would be deeply unpopular with savers, who have paid the price for ultra-low interest rates since the BoE cut borrowing costs following the financial crisis.
Santander, whose 123 account had paid 3% on sums up to £20,000, halved the rate last week, blaming the prospect of prolonged low interest rates and increased costs for the banking industry. Other banks are paying little or nothing on savings with instant access or short notice periods.
Barclays cut its “everyday saver” rate on Friday to 0.05% from 0.25%, joining other banks – such as HSBC’s First Direct – in imposing large cuts to savings rates.