Negative Interest Rates
It has been well over a decade since the Bank of England cut the base rate to historic low levels; reaching 0.5% in March 2009 following the banking crisis. The base rate has fluctuated a few times in recent years since, but never rising beyond 0.75%. In March this year the fallout from the Coronavirus pandemic saw the rate cut from its historic lowest ever levels to an even lower level; 0.1%, where it remains today. This, of course, leaves very little room for further rate cuts to stimulate the economy.
However, taking things one step further, the Bank of England announced in September that it is examining how negative interest rates might be implemented in the UK. Ever since, of course, the media has been shrieking with suggestions that suddenly savers will soon have to pay the banks to hold their money, and borrowers will be paid to take out mortgages.
Whilst this is new territory here in the UK, negative interest rates have already been seen in other areas, for example Japan, Eurozone, Sweden, Denmark and Switzerland. In the main, investors do not have to pay to deposit their savings although typically they would not receive any interest either; something we’re almost accustomed to already with such low rates here in the UK.
Although of course it remains to be seen how negative interest rates would be applied in practice, our view is that this is only likely to apply to very high cash balances and non-personal accounts, for example deposit accounts for companies, trusts and other institutions. It is quite possible that we will see increases to account charges or new charges being introduced, especially if it seems as though negative rates will be here to stay for a while. Needless to say, we’ll be keeping a close eye on developments.
Whilst in theory mortgage borrowers would be paid by lenders for taking a loan, this seems highly unlikely to happen in practice. Many loans in the UK are at a fixed rate of interest and of the remainder, many are likely to have in place some form of collar that prevents the borrowing rate going negative. We expect that tales of the average borrower being “paid” to borrow will be few and far between.
It is important to remember against the backdrop of media articles on the subject that seeing negative interest rates introduced in the UK is far from a foregone conclusion right now. The Bank of England recently indicating it is a “tool in the bag” and is at this stage simply reviewing the practical implications of using such a policy, rather than expressing their intention to actually do so.
More pressing, in my view, is to keep existing savings rates under review. Many banks have recently declared a reduction in their rates, one such example being the NS&I Income Bonds. This product was offering a market leading rate of 1.16% until it was recently announced that this is to be cut to an astonishing 0.01%. It is still possible to achieve a savings rate 100 times higher than this. If you would like assistance in reviewing your current savings accounts to help make the best of your cash, please get in touch.
Michael Roberts FPFS
Chartered Financial Planner and Director
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