In the quote below, identify the pros and cons of negative interest rate policies. Briefly explain these effects.

Quote:

[Bank of England] Governor Andrew Bailey is signaling that extreme measures such as negative interest rates are on the table. Rightly so.

Negative interest rates are the last resort of the central banker and not to be used unless absolutely necessary. At least that is the thinking inside the forbidding walls of the Bank's offices on Threadneedle Street. Only a couple of weeks ago, governor Andrew Bailey said, in effect, that the Bank had never lowered interest rates to below zero and wasn't going to start now.

With the Bank rate standing at 0.1%, it seemed odd to make a distinction between a moderately positive rate of interest and a moderately negative one. But in the world of central banking, such posturing appears alive and well. Only those economies considered weak and feeble go negative. Not the UK.

Of course, there was more substance to Bailey's argument than that. Like his predecessors, he argued that negative rates would put a huge strain on high street banks, which would see their profit margins on lending squeezed...

...Last week he changed his tune and argued it would be "foolish" to rule out such a move. For many economists, Bailey was recognising the magnitude of the current downturn. And, theoretically, there are ways to keep high street lenders safe from harm.

Negative rates allow the borrower to pay back less at the end of the term than originally borrowed. Borrowing becomes very attractive, and nervous households that might not have taken a loan to buy a car or new kitchen might go ahead with credit this cheap...

...The problem lies with savers who are offered negative interest on their savings. What happens if they refuse to accept this new reality?

...Bailey's gloomier outlook for the UK - one that expects a shallower recession but several years of business bankruptcies, higher unemployment and lower investment - could see the UK follow the Danes, who have sanctioned the high street lender Jyske Bank's plan to offer negative-rate mortgages.

A poll of City economists found that the majority believe the unintended consequences of negative rates in an economy the size of Britain's will deter the central bank from pulling that particular lever.

Let's hope the final assessment sets aside any notion of national pride and focuses on the real-world consequences. Britain is going to need all the support it can get from its central bank in the next few years.

[The Guardian, May 24th 2020]