What are Negative Interest Rates?

February 2021
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Following the monthly meeting of the Bank of England’s Monetary Policy Committee (MPC), Bank Governor, Andrew Bailey, said high street banks would need six months to prepare for negative interest rates. Yet the MPC unanimously voted to maintain interest rates at 0.1% and has no immediate plans to force rates lower. What would negative rates mean for savers and borrowers and how likely are they? 

The Bank of England base rate sets the rate at which the Bank charges banks and financial institutions when lending money and will pay on deposits made with it. The main task of the Bank of England is to keep inflation at or near 2%. This is seen as an indicator of a healthy economy expanding at a sustainable rate. During lockdown inflation has been depressed by the inability of consumers to spend money.  Policymakers fear that even when lockdown restrictions ease spending may not immediately bounce back to pre Covid levels.

During the pandemic savers have squirrelled away £125 billion more in UK savings than last year but according to a survey, conducted by the Bank,70% of savers plan to keep their savings. Turning interest rates negative is designed to encourage spending which will support jobs and drive tax revenues within the economy.

What does this mean for borrowers? 

While rates are likely to stay lower for longer it is unlikely that UK mortgage lenders will start to pay borrowers for the privilege of lending them money. Bank profit margins are already squeezed by low rates and they are likely to suffer losses on pre lockdown commercial lending to Covid stricken businesses.  

The Prudential Regulatory Authority made it clear to borrowers with Cheltenham & Gloucester, who had mortgages tracking below base rate that the obligation to pay interest was one way. However, shopping around for a better deal is likely to be made easier. Our bionic mortgage service enables borrowers to get an indicative snapshot of the rates and terms available.  https://www.lebc-group.com/bionic-advice/bionic-mortgages

Graduates with pre 2012 student loans would see their debt, which is linked to Bank of England base rate, grow more slowly but would not see any drop in repayments as these are based on 9% of earnings above £19,370.

What does this mean for savers? 

If we look abroad several countries already operate negative interest rates, Japan, Switzerland, Denmark, Sweden and the 19 Eurozone countries. Switzerland has a negative rate of -0.75% but only charges this on larger deposits over 2 million Swiss francs. Some German banks charge depositors with larger sums, whereas in the other countries negative rates are levied on corporations but savers simply earn nothing on their money. 

In the event that the UK were to follow suit it is unlikely that consumers would  be charged to deposit funds, especially as building societies are required to raise half their  capital from individual savers and cannot borrow from institutions in the same way as banks. 

That said, banks are increasingly charging nominal fees for banking facilities, with rewards for spending available to offset them and during 2020 savings rates were cut across the board. According to the Bank of England the average instant access account is now paying 0.12% and notice accounts 0.51%. With inflation at 0.6% the real return on savings at these levels is already negative. 

For those for whom cash remains an important part of their overall asset mix the LEBC Cash Management Service gives access to a wide range of credit rated  deposit accounts,  with ongoing monitoring of the terms available, within the Financial Services Compensation Scheme protected limits and a convenient one time  online application process. https://www.lebc-group.com/bionic-advice/bionic-cash

Savers with substantial cash deposits could assess how much they need in accessible cash and consider investing any balance for potential longer term growth, which may keep pace with inflation. This may include investing in shares and fixed interest loans to companies or Government index linked bonds, with the asset mix determined by individual risk profile and personal circumstances. However, these types of investments do not offer the same capital security as a deposit accounts and their value is not guaranteed, capital is at risk.  

Our advisers can help with personalised recommendations to suit every individual risk profile. To discuss your options please contact your usual LEBC adviser, email enquiries@lebc-group.com  or call 0800 055 6585. 

Kay Ingram                      
Public Policy Director                              
February 2021

Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. The contents of this blog are for information purposes only and do not constitute individual advice. All information is based on our current understanding of taxation legislation and regulations. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts.

LEBC’s bionic services enable clients to access services remotely using technology but with access to human and expert input. They are an ideal way to overcome the restrictions on meeting during lockdown while still attending to important matters.  Services offered include wills and powers of attorney, mortgages, life and health insurance and a cash savings platform as well as our PFP portal which offers secure exchange of correspondence and documents. 

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