Could we see Negative Interest Rates in the UK?
In February, the Daily Telegraph had a headline which must have alarmed savers up and down the land: ‘Savers face threat of negative interest rates.’
According to the story, the Bank of England had told the clearing banks that they ‘must be ready to introduce the policy in the next six months.’
What are negative interest rates? Have other countries introduced them? And are we really likely to see them in the UK?
Negative interest rates are exactly what the name suggests. Rather than being paid interest on any money on deposit, a negative interest rate means that it costs you money to have funds on deposit. To use some very simple maths, if you have £1,000 on deposit at an interest rate of 1% you have £1,010 at the end of the year. If the interest was a negative 1% then you would have £990. Add in the effects of inflation and you would be demonstrably worse off by leaving your money on deposit.
Negative interest rates are a weapon used by central banks in a bid to stimulate economic growth. So the central banks can force the clearing banks to pay negative interest rates to savers, forcing them to spend and it can pay negative interest on money the clearing banks have on deposit, encouraging them to make loans.
Until quite recently it was thought that interest rates could not go below zero – but this has not proved to be the case, with banks in Europe and Japan using negative rates to try and stimulate their economies. Germany – where savers have an estimated €2.5tn (£2.18tn) on deposit – is one country where savers have been battling negative interest rates.
So could we see such rates in the UK? The British public reportedly have built up savings between £100bn and £125bn during the last year. There is reportedly a further £225bn in accounts which pay zero interest.
Clearly if this money were released into the economy it would provide a huge stimulus – and the Bank of England is rumoured to have held conversations with more than 100 high street and online lenders. Rates have already been cut to 0.1% during the pandemic – so could they turn negative?
Most commentators seem to think it unlikely, arguing that the six months the Bank of England has given banks to prepare for negative interest rates is long enough to see a ‘vaccine-fuelled recovery’ in the economy.
But if 2020 taught us anything, it was that what was unthinkable at the beginning of the month was the norm by the end of it. While negative interest rates certainly seem unlikely, it might be worth considering that ‘never say never’ is truer than ever.