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Investors pay to lend the Treasury money as Bailey hints at negative rates

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Investors paid the British state for the privilege of lending it money for the first time as&nbsp;Andrew Bailey gave his strongest hint&nbsp;yet that interest rates could turn negative.After&nbsp;inflation plunged to a near-four year low in a fresh sign of the disaster gripping the economy,&nbsp;Government bond yields fell into unprecedented territory below zero - meaning that investors were so desperate to park their cash in a safe haven that they were willing to pay the Treasury to take it.&nbsp;Meanwhile&nbsp;Bank of England Governor Mr Bailey vowed to&nbsp;pull&nbsp;every lever at his disposal to battle the coronavirus recession, even if that means breaking economic taboos long resisted in Threadneedle Street.Mr Bailey&nbsp;refused to rule out negative rates at a meeting with MPs,&nbsp;reversing a long-held policy at the Bank and suggesting it could follow in the footsteps of Japan and the Eurozone.Speaking to the&nbsp;Treasury Select Committee, he said: “I have changed my position.“In this situation we have to review tools as a matter of regularity,&nbsp; we have to keep them under consideration - I say that in the spirit of ruling nothing out and ruling nothing in.”When he was appointed in March, Mr Bailey told the same MPs that “as things stand, I do not regard negative official interest rates as a plausible tool”.However, he described&nbsp;his thoughts from two months ago as “ancient history” because of the pace at which the recession has engulfed the economy.The current rate of 0.1pc is itself unprecedented, showing the Bank is&nbsp;prepared to be creative to help get the economy through the crisis.Policymakers includingand Monetary Policy Member member Silvana Tenryero have recently discussed negative rates, and financial markets now predict they will happen later this year.The policy would mean that&nbsp;banks are charged for hoarding cash rather than lending it out. Although ordinary savers are very unlikely to be hit with negative rates, it would further crush their already rock bottom returns. The move would keep mortgage costs close to all-time loans in a boon for borrowers,&nbsp;&nbsp;but would also hammer profits in Britain's banking industry.Mr Bailey said the Bank would have to consider how the policy could affect the structure and stability of the financial system, as well as the degree to which banks and building societies could pass the change on to borrowers and savers.He said: “All of those things we will have to consider as well as any measures we would take alongside it to counteract those things, if we thought it was the right thing to do."The Governor added that experiments with negative rates elsewhere have not always worked. He said:&nbsp;“There are some pretty mixed reviews of it, I have to say.”Interest rates have already gone negative for some government bonds. For the first time on Wednesday, investors bought a gilt from the Treasury knowing that they will get less cash back than they put in when it matures in three years’ time.It is the latest indication financial institutions are keen to put their pounds in the safest possible havens, even as the GovernmentThe three-year gilt nominally pays an interest rate of 0.75pc, but strong demand from investors meant the Debt Management Office raised £3.75bn with a yield of minus 0.003pc.The Bank of England is supporting the market by buying £200bn of gilts - pushing down returns because a buyer with huge firepower is in the market&nbsp;- while worries over risk are also encouraging corporate investors to snap them up.Low inflation also helps as investors have less to fear from price rises eating away the value of their bonds.Inflation hit its lowest level for nearly four years in April as plunging energy and petrol prices outweighed rising prices for “lockdown” favourites such as games consoles, the Office for National Statistics said.The fall in the consumer prices index to 0.8pc – the lowest since August 2016 – prompted forecastsThe biggest drag on inflation was falling energy bills following changes in the Government’s price cap on the standard variable tariffs used by 15m households, as well as lower water bills.&nbsp;A plunge in oil prices to their lowest level in nearly two decades also prompted a 10.4p a litre drop in petrol prices – the biggest monthly decline since the Office for National Statistics&nbsp;began collecting data 30 years ago.At the same time desperate retailers slashed clothes prices as shops were forced to close.Related TopicsThe Telegraph values your comments but kindly requests all posts are on topic, constructive and respectful. Please review our.You need to be a subscriber to join the conversation. Find out more.Show commentsAdvertisementRelated TopicsWe rely on advertising to help fund our award-winning journalism.We urge you to turn off your ad blocker for The Telegraph website so that you can continue to access our quality content in the future.Thank you for your support.Need help?Visit ourpage.Close

Investors paid the British state for the privilege of lending it money for the first time as&nbsp;Andrew Bailey gave his strongest hint&nbsp;yet that interest rates could turn negative.After&nbsp;inflation plunged to a near-four year low in a fresh sign of the disaster gripping the economy,&nbsp;Government bond yields fell into unprecedented territory below zero - meaning that investors were so desperate to park their cash in a safe haven that they were willing to pay the Treasury to take it.&nbsp;Meanwhile&nbsp;Bank of England Governor Mr Bailey vowed to&nbsp;pull&nbsp;every lever at his...

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By Tim Wallace

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Tim Wallace

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Investors pay to lend the Treasury money as Bailey hints at negative rates

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