The Bank of England has taken another step towards adding negative interest rates to its crisis-fighting armoury. High Street banks have been given six months to be ready. Policymakers stressed that this does not mean that below zero borrowing costs were “imminent, or indeed in prospect”. But what are negative interest rates? And could a world that is negative for savers are positive for borrowers end up doing more harm than good?
What are negative interest rates?
The term “interest rates” is often used with the Bank of England base rate. Described as the “single most important interest rate in the UK”, the base rate determines how much interest the BoE pays to financial institutions that place money with it. Also what it charges the institutions to borrow.
The high street banks also use it to decide how much interest savers receive. Also, what they charge people who take out a loan or mortgage. The Bank of England usually lowers interest rates when it wants people to spend more and save less. It cut rates to a fresh low of 0.1% in March 2020 to try to kick start the economy amid the coronavirus pandemic. Taking interest rates below zero should have the same effect. But in practice, it gets a bit more complicated. Why would anyone pay to put money in a savings account or lend someone money, when they can keep the cash at home with no charge?
Why might this happen now?
The Bank of England’s main priority is to keep prices across the economy increasing each year. This is the Bank’s inflation target, which is set at 2% by the government. Inflation measures the rate at which the cost of living is rising. And, measured by the consumer prices index (CPI), it stood at 0.6% in December, up from 0.3% in November 2020.
Low inflation means prices aren’t rising fast enough. If it remains low for too long, bosses start factoring that into pay reviews. This can then effect consumer confidence and spending. Central banks have been cutting interest rates to encourage inflation for years. But as rates approached zero across the developed world, a handful went a step further. Sweden, Switzerland, Japan and the 19 nations of the eurozone all took interest rates sub-zero. In Switzerland, negative interest rates discouraging investors from pouring money into the country.
How will this affect UK savers?
British savers have already seen their returns dwindle in recent years. The average UK instant access account pays 0.12%, according to the Bank of England. While accounts that require you to lock your money away currently offer an average return of 0.51%. In countries with below zero interest rates, commercial banks have passed them on to big companies. However, evidence suggests there is a very high bar to pass the impact on to the ordinary saver. Christina Nyman, of Swedish lender Handelsbanken, said charging savers to put money in their own accounts is seen as “taboo” in Sweden. She says: “Competition is fierce, and households are ready to move their money to another bank, so nobody wants to lose business”.
Swiss banks UBS and Credit Suisse only impose negative rates on deposits of more than 2 million Swiss francs. In Germany some banks impose charges on deposits of more than €100,000 (£90,000). This has seen some people have started stashing their money in v