Negative interest rates: how likely are they, and what would they mean?

As the world continues to grapple with the economic fallout of coronavirus, the Bank of England (BoE) has raised suspicions it may be considering a radical new weapon in its fight to bring the UK’s finances in line: negative interest rates.

If it does introduce them, it will be the first time in the Bank’s 327-year history.

Since the last financial crash of 2007, several countries including Japan, Switzerland and Denmark have used negative interest rates, but does that mean Britain has to do the same? While the BoE told high street banks to be “operationally ready” for negative rates within six months, policymakers have insisted negative rates are not imminent, or even a real prospect.

Read on to discover what negative interest rates are, what they mean for your money, and whether the BoE could adopt them.

What are negative interest rates?

The BOE sets a “base rate” of interest, which is the interest the bank pays financial institutions to hold money with it. This is much the same as high street banks paying you to deposit savings with them, the rates of which are set using the BoE’s base rate.

The base rate also determines how your bank charges for a loan or mortgage.

Negative rates are when the BOE’s base rate is set below zero, which effectively means it charges high street banks for depositing money with it. The catch could be that high street banks may then pass this charge on to customers keeping their savings with them.

Negative interest rates could help kick-start the economy

The idea behind negative interest rates is to stimulate Britain’s economy in two ways:

  • As high street banks would pay the Bank of England to deposit customers’ money, it is more cost-effective for them to lend money instead.
  • When an economy suffers a downturn, people wait to see if it improves before they start spending again. As a result, money sits in high street banks, which means less consumer spending, lower demand for goods and an economic slump that’s hard to escape. By making it more expensive for customers to hold money in their bank, people are incentivised to spend and stimulate the economy.

Other countries have used negative interest rates

Denmark, Switzerland, and Japan have all been using negative interest rates, and Sweden used them in 2007 after the financial crisis, and again in 2015. In May last year, two leading economists stated the move had a negligible impact on helping Sweden.

More importantly though, the European Central Bank, which determines interest rates for its 19 member states, has used negative interest rates.

But does that mean Britain needs to follow? Not necessarily, BOE’s Deputy Governor Ben Broadbent told CNBC recently.

He said that as Britain is in a “different place” to Europe in terms of inflation, there was no imminent need for negative interest rates.

But if negative interest rates were introduced, what would it mean for savers and borrowers alike?

Banks could charge you for your savings – but will they?

The last 10 years has been challenging for savers, with interest rates at depressingly low levels. According to the BBC, the average UK instant access account pays just 0.12%.

Yet negative rates mean high street banks could be charging you to deposit your money with them instead of paying interest – no matter how small that charge may be.

But historically, where countries have gone into negative interest rates, high street banks and building societies have been reluctant to charge savers, despite the fact they themselves were paying a central bank.

This is Money has reported that some analysts have predicted that this will be the same in Britain if we enter negative interest rates, as banks would be too worried about savers withdrawing their money.

However, if you are “super-rich”, your bank may take a different approach.

In 2019, the Guardian reported that UBS had started to charge ultra-rich clients for cash savings of more than €500,000 (£449,000), starting at 0.6% a year and rising to 0.75% on larger deposits.

In 2020, Starling Bank became the first British bank to introduce negative interest rates for personal account holders holding high amounts in euros.

Mortgages rates are unlikely to fall below 0%

If you took out a fixed-rate mortgage in recent years, it’s unlikely you’ll see any changes to your monthly repayments should rates become negative.

While, in theory, a mortgage linked to the Bank of England’s base rate – or a lender’s standard variable rate (SVR) – could be reduced, the bad news is that it’s unlikely due to the terms of the mortgage.

Most lenders have a clause known as a “collar” in their terms, which means the mortgage will not fall below a certain interest rate, such as 0%.

Withdrawing your money is a security risk

If banks were to charge you to keep your savings with them, you may be tempted to withdraw it. This would bring huge security risks, as hiding it under the mattress or any other imaginative place could result in your hard-earned savings being stolen.

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