Speaking to Sky News, the Harvard Professor claimed the only way to get the UK economy back on track should Britain suffer a second coronavirus wave, would be to slash interest rates. In a major finance warning, he said: “If a couple of years from now we’re still growing really slowly, unemployment is high and we’re still having problems and interest rates are zero, I would advocate having deeply negative interest rates to try to spur consumption.
“In theory, it works a lot the same as when you have high inflation and you cut interest rates from five percent to three percent.
“I’d say certainly minus three percent would be a thing you’d like to be able to do.
“They can’t right now, it would take a lot of preparation but it wouldn’t be that hard.”
He explained: “We have to have a way certainly in this particular crisis that we’re in.
“There’s going to be restructuring, there isn’t going to be the same economy when we get to the other end of this.
Interest rates in UK could be slashed to minus 3 percent
“Some kind of businesses just aren’t going to be viable, other new ones will appear.
“So the problem with the current strategy which particularly with the United States just involves guaranteeing everything is that’s not sustainable.
“If we come back really quickly it won’t be a problem, but if we don’t there’s a second wave and things will continue, you have to give flexibility for the system to sort itself out.
“Negative rates do that, it’s cheap to borrow but it’s not free.”
It comes as households’ consumer credit borrowing shrunk by 3 percent annually in May, marking the weakest growth since records started in 1994, according to Bank of England figures.
The 3 percent contraction, which includes borrowing using credit cards, personal loans and overdrafts, follows a 0.4 percent 12-month fall in April.
Within May’s figure, the annual growth rate of credit card lending was negative for the third month running, falling to minus 10.7 percent, compared with 3.5 percent as recently as February.
Growth in other types of borrowing remained positive, at 0.7 percent.
The Bank’s Money and Credit report said Covid-19 continued to weigh on spending in May as households repaid more in loans from banks overall than they took out.
The number of mortgages approved to home buyers in May also fell to the lowest number since the Bank started tracking the mortgage approval figures in this way, at 9,273.
This was around a third of the trough during the financial crisis in 2008.
Meanwhile, cautious households continued to shore up their savings.
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Households’ deposits increased by a record £25.6 billion in May, following strong increases in March (£14.3 billion) and April (£16.7 billion).
In the six months to February, household deposits had increased by an average of £5 billion per month.
The Bank also said the typical interest rate paid on people’s deposits fell in May, to 0.87 percent on new deposits and 0.29 percent on outstanding deposits.
Meanwhile, the typical rate some borrowers were paying became cheaper.
Typical rates on new personal loans to fell to 5.10 percent in May – the lowest since these records started in 2016, and compares with a rate of around 7 percent at the start of 2020.
The typical cost of credit card borrowing also ticked down, from 18.54 percent in April to 18.36 percent in May.