Bank of England
Rather like the fiction of Father Christmas, HM Government perpetuates the Bank Rate myth. Just as we are expected to believe that Father Christmas descends chimneys to deliver gifts, we are expected to believe that the official Bank Rate is similarly beneficial . . . would that it were true!
Most of us realise sooner or later that Father Christmas does not deliver the goods, but few seem to question the fact that the Bank of England does not set actual bank rates. The reality is that banks set their own rates which are much higher than the Bank of England’s rate for borrowers but which can be lower for savers. In short, commercial bank rates are loosely connected to the official Bank Rate.
Central bank (of England) policy in recent decades has been detrimental to savings and savers. Not only have abnormally low interest rates paid to lenders been punitive, but they have also inhibited private pension provision. Moreover low rates, having been operated over such a prolonged period, will eventually give rise to other economic distortions; for example they have facilitated huge increases in property prices. Consequently, the prospect of even marginal increases in mortgage interest rates creates fear in borrowers about their inability to meet due repayments. So much for the benign impact of low interest rates!
The introduction of a negative Bank Rate prompts the idea that, not only can the negative rate be increased, but so can the official lending rate be decreased to zero (or less). This is possible quite simply because commercial banks fix their own rates and can continue to do so.
An article about this subject in the Guardian [http://www.theguardian.com/business/2014/jun/05/negative-interest-rates-european-central-bank ] admits that no one knows the consequences of introducing the negative interest rate.
However, one thing seems certain: Eurozone banks will look for safe havens outside the Eurozone itself. Who will predict that Britain will not be a recipient of much of the capital being re-located?
As for the effects on the economies of individual EU member states, this very much depends upon the amounts lent within the Eurozone itself and the amount re-located outside that zone. It need hardly be said that the overall effect of the new negative interest rate may well prove to be damaging to the EU.