Bank weighs cutting rate for bank reserves

The economy has probably started growing again but inflation risks are still to the downside, King told a parliamentary committee.

He also defended the work of the BoE Monetary Policy Committee (MPC) after criticism from former member David Blanchflower, who said King dominated it with his hawkish views on interest rates.

British interest rate futures rallied and sterling fell on Tuesday after King floated the idea of following Sweden and cutting the rate of interest it pays on commercial bank deposits in order to encourage more lending.

In Sweden the central bank has reduced the deposit rate for banks holding reserves with it to -0.25 per cent, encouraging the banks to keep money flowing in the markets -- rather than held at the central bank with a negative interest rate.

"Of course people have talked about whether it would be sensible to reduce the rate at which ... reserves are remunerated and it is something which we are looking at," King told parliament's Treasury Committee.

There has been concern the extra 175 billion pounds being pumped into the economy through the BoE's quantitative easing programme are being hoarded by banks rather than finding their way to struggling businesses.

SIGNS OF GROWTH

Britain, facing a general election by next June, is struggling to pull out of its deepest recession since World War Two. King said he saw some positive signs.

"Falls in output have broadly come to an end and we are beginning to see some very small signs of positive growth," King told parliament's Treasury Committee.