Of course interest rates can go below zero

That something can be done is of course not quite the same as the statement that this thing should be done.

UK interest rates can be cut below zero if needed to ward off the scars of Covid-19 or an economic hit from a no-deal Brexit, the Bank of England's Michael Saunders has said.

Rates are currently at a record low of 0.1pc but the Bank has embarked on an review of negative rates in the event the Monetary Policy Committee decides to go further still.

MPC member Michael Saunders said his own view was that the lower bound for interest rates was "probably a little below zero"

We agree with the “can”. The lower bound isn’t that zero - we can see that as there are negative rates out there already, both nominal and real - which leads to the question, well, what is the lower bound?

The answer coming from considering alternatives, substitution. At some point having money in the bank - at some negative interest rate that is - becomes more expensive than not having money in the bank. Or, given financial markets, having the money not in some bond or repo instrument or whatever. As Tyler Cowen pointed out many years ago this is really constrained by the cost of holding cash in a vault. That might be half a percent, one, possibly even two but it does exist as that constraint.

If you’d lose 10% a year from having money in the banking system then having it not in it at a cost of 2% is an obvious thing to do. Move those numbers around as you wish to find that actual lower interest rate bound.

Below zero interest rates can be had, certainly, but not all that far below zero. Whether it should be done is another matter of course. Our suspicion is that even trying it would lead to our needing a radical change to pension funding arrangements. Imagine the capital required now to fund a pension payable in 50 years’ time in a negative interest rate world. Near none of those organisations still running defined benefit pensions would survive - and we really, really, should account for civil service and governmental body pensions in the same manner as well.