FXStreet (Bali) - Ian McCafferty, member of the Monetary Policy Committee at the Bank of England, gave an excusive interview to the UK's Independent, noting that an unbalanced UK recovery driven by domestic spending poses a "number of risks" including damage from a stronger pound, adding that interest rates could also “potentially” turn negative.

Key points - UK Independent

Mr McCafferty, a member of the Bank’s Monetary Policy Committee, told The Independent that the MPC was keeping a “close eye” on the current account as well as watching for risks from a stronger pound, which will hit exporters and increase the burden on household spending to keep the recovery going.

He said: “The current shape of the recovery introduces a number of risks which we have to keep a close eye on ... In particular, the fact that we have a healthy recovery at this stage, whereas other policymakers – particularly the ECB – are carrying out further policy easing, does give us an upward risk on the currency in the short term, which would exacerbate that dependence on domestic demand. But at the same time I would rather have a recovery than no recovery.”

Interest rates could also “potentially” turn negative, Mr McCafferty said, adding that it was up to rate-setters “to consider all eventualities” after the cost of living hit an all-time low of 0.3 per cent in January. The Bank cut interest rates to 0.5 per cent in March 2009 but refused to go further for fear of harming a banking system that was still weak at the time. Banks have since become more resilient, meaning rates could sink even lower if necessary, he added. “Have we run out of ammunition? No we haven’t.”

Could they turn negative? “Potentially,” he said. “There comes a point – and it will be interesting to watch what happens in other countries where negative rates are already in place – where you get a behaviour change.

“You don’t want to hold reserves at a penal rate when you could simply build yourself a high-security storage facility and hoard cash.”

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