BANK of England Governor Andrew Bailey has downplayed the likelihood of a move into negative interest rates territory, sending sterling up against the dollar and euro this morning.

Mr Bailey acknowledged negative rates was a “controversial policy” and “at first glance counter-intuitive”, as investors expect to receive a rate of return on deposits they lodge with banks, instead of having to pay for the “privilege”.

Speaking at a Scottish Chambers of Commerce webinar this morning, Mr Bailey said that while in “simple” economic and mathematical terms there is nothing to stop negative rates, “there are a lot of other issues with it”.

Sterling rose 0.6 per cent to $1.3608 on the comments, and half a per cent against the euro to 89.49p.

Mr Bailey told the Chambers webinar that no country in the world has “really ever actually used negatives interests in what I might call the retail end of the market. It’s really been used much more at the wholesale end to pay negative interest rates on large wholesale deposits within the financial system, and large corporate deposits.”

He observed that negative rates had been used by the European Central Bank in the recovery phase from the euro area crisis to stimulate corporate investment.

But he added: “The transmission of this depends on the banking system. Banks do have to earn a rate of return. Negative interest rates complicate the rate of return because they put much more pressure on the so-called net interest rate margins. That in turn depends on how negative interest rates are passed through into the economy.

“If you do not pass them through the retail world, in either deposits or borrowing, that switches off part of the monetary transmission.

“One of the things we have to judge is are they then effective? That is something we spend a lot of time looking at.”

Mr Bailey added that the Bank of England was spending time working with the banks to explore if negative rates would be workable. He said: “It does come down to quite important issues like are the IT systems of banks set up to take negative numbers, or do they blow up when you try to do arithmetic with negative numbers. We are working on that.”