"While we can never have complete certainty, negative interest rates should with high likelihood boost UK growth and inflation."
During a speech yesterday, Tenreyro said that negative interest rates have 'worked effectively' in other countries, with "some of the evidence pointing to more powerful effects". She said that the effects of negative rates "should lead to higher consumption and investment, and boost net exports and inflation".
The Bank is currently examining the feasibility of negative interest rates. The MPC would then face a separate decision over whether they are the right tool to use during its meetings.
Tenreyro said the evidence from experiences of negative rates in other countries suggests that they have been effective at boosting lending and activity. She said there is "no clear evidence that negative rates have reduced bank profits", adding that a number of studies find "positive impacts, once you take into account the boost to the economy".
The research also found that there is "strong evidence of transmission into looser bank lending conditions". Several euro area studies have found that negative rates lowered loan rates and stimulated credit growth. For Sweden, studies agree that the Riksbank’s initial cuts into negative territory were passed through to mortgage rates, but disagree on the extent of pass-through of subsequent rate cuts.
Taking these points together, Tenreyro said the evidence suggests that "negative rates can provide significant stimulus".
Tenreyro concluded: "While we can never have complete certainty, negative interest rates should with high likelihood boost UK growth and inflation. Cutting Bank Rate to its record low of 0.1% has helped loosen lending conditions relative to the counterfactual (of no policy change), and I believe further cuts would continue to provide stimulus.
"It is possible that bank-lending channels impart slightly less stimulus relative to experiences in other countries, at least initially, but I would consider it as very unlikely that we do not see any boost to lending.
"Looser monetary policy can help the economy recover faster, bringing inflation back to target, while also preventing some of the job losses and business failures that could otherwise reduce potential output in future.
"The MPC has given guidance that policy will not be tightened before there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the inflation target sustainably. It is possible that more stimulus be needed to do so at an appropriate pace. If that is the case, having negative rates in our toolbox will, in my view, be important."
