By David Milliken and Andy Bruce
LONDON (Reuters) - Cutting interest rates below zero risks damaging British banks' capacity to lend, and is not currently the right tool for the Bank of England to stimulate the economy, Deputy Governor Dave Ramsden said on Wednesday.
"While there might be an appropriate time to use negative rates, that time is not right now," Ramsden said, adding that asset purchases were a better way to boost demand.
Economists polled by Reuters expect the BoE to expand its asset purchase programme by 100 billion pounds next month to 845 billion pounds, but do not expect it to cut rates below zero this year or next.
In August, BoE Governor Andrew Bailey said the central bank was looking more closely at negative interest rates - a tool used by the European Central Bank and Bank of Japan - but said no decision had been taken about whether it was viable.
Ramsden, and BoE Chief Economist Andy Haldane, have both expressed doubts about the idea.
"There can be knock-on economic effects through the banking system. These effects could reduce or even counteract the stimulus from negative rates," Ramsden said, saying negative rates could reduce banks' incentive to lend, or not be passed on to borrowers.
Ramsden said he was also worried about growing signs of higher unemployment, especially for younger people, and of long-term damage to the economy from the coronavirus pandemic.
"There is a real risk of a more persistent period of higher unemployment, and the recent strength in income growth might not be sustained," he said.
"The negative impact on the supply side of the economy, or degree of scarring, could potentially be greater than the 1.5% we have assumed to date based."