This last channel raises considerable controversy, for savers feel aggrieved. Justifiably. They did not cause this crisis and yet they bear a considerable part of the burden of putting things right. Moreover, it is not certain that even lower rates would actually boost demand. For the losers might cut their spending by more than the gainers increased theirs.
But there is a wrinkle. The banks get paid Bank Rate on the reserves they hold with the Bank of England. As a result of Quantitative Easing (QE), these reserves have shot up. In normal conditions, the banks would have sought to reduce these reserves by increasing their lending.
In fact, they have largely sat on their hands and collected their 0.5pc per annum, risk free, from the Bank. There is a chance, surely, that if, rather than receiving 0.5pc, they had to pay 0.5pc, they would do more lending.
One counter-argument is that, faced with an unappealing economic environment, they would stick the money into gilts, thereby depressing yields still more. If they did this, then cutting Bank Rate would simply amount to giving QE an extra kicker. Does it need one? Does it deserve one?
And further reductions in Bank Rate might create serious difficulties for banks. Interest rates for bank depositors are pitifully low already. Banks would probably not be able to pass on the full extent of any cut in Bank Rate to their depositors, certainly not to the point of charging them to hold deposits. Meanwhile, the rates on loans tied to Bank Rate would fall. For some lucky borrowers, the rate on mortgages would turn negative. So bank margins would fall – which would not help the cause of strengthening the banks and boosting bank lending.
The solution might be to set negative rates just for tranches of bank reserve holdings above some specified norm. The problem here is that this would introduce ambiguity as to exactly what Bank Rate was. Herein lies the scope for a legal nightmare.
Yet this ought not to be beyond the wit of man to solve. Bank Rate could continue to refer to the rate at which the Bank lends to the banks, while a new term – I suggest Reserve Rate – would apply to the interest rate that the banks received on their deposits at the Bank.
Not much boredom here. Why has the debate about monetary policy opened up now? Because the imminent arrival of Mark Carney has unleashed a wave of free thinking and free speaking? Perhaps the old guard at the Bank don’t want to be seen as fuddy duddies.
Anyway, the result is that the Carney era has already begun.
More importantly, greater emphasis is now placed on monetary policy because of the abject failure of the Treasury to do anything. As the Bank has become less orthodox, so the Treasury has kept banging the same old Plan A drum, even as the rating agencies, never mind the rest of us, have tired of the tune.
We all know that there are limits to what the Treasury can do. But these limits don’t start at zero. When contemplating the hyper-activity in Threadneedle Street, be mindful of the intellectual constipation at the other end of town.
Roger Bootle is managing director of Capital Economics.