Firstly, we very much trust that you and your families remain healthy and happy during this crisis.
We have been receiving questions from clients in relation to the recent comments by the new Bank of England Governor – Andrew Bailey, refusing to rule out cutting interest rates below zero in response to the crisis created by Covid-19.
The BoE has already slashed rates to a record low of 0.1% as the pandemic is expected to drag the UK’s economy into the worst recession on record.
Click the link to read the article written for Sky News – Coronavirus: “Foolish” to rule out negative rates says BoE Governor:
Client Question – ‘What does Negative Interest rates mean to me?
Firstly, not only the BoE but the Federal Reserve and other central banks are considering using negative rates as a tool to stimulate the economy due to the huge downturn created by Covid-19.
What is a negative interest rate?
A ‘negative’ interest rate would create a potential major impact for cash deposits, as Banks would be charged to ‘deposit’ or hold money overnight with the Reserve Bank.
Generally the ‘tool’ is intended to have the effect of increasing Bank’s desire to lend. A way to describe negative rates would be ‘turning money into a hot potato’.
The impact would be sizeable to Banks as they would be driven to lend at very low rates and pay the Reserve Bank for taking money on deposit.
Would depositors be charged to hold savings accounts?
From what is understood of International experience, it is unusual for negative cash rates to turn into a negative retail rate, although some European Banks have charged people to hold large sums of capital on deposit.
Putting aside fees for some bank accounts, negative rates are unlikely to mean a retail depositor suffers a cost or penalty to deposit capital but the detail (should negative rates develop) is yet to unfold.
Banks rely on depositors for funding so if the depositor suffered, the line of deposit supply could dry up…….
Nevertheless, deposits are likely to remain unattractive for the foreseeable future.
We always conclude an absolute recommendation for depositors to make sure they protect themselves with FSCS protection and where large holdings are in place talk to us – we have solutions to manage risk. Chasing deposit returns will become futile if negative rates develop.
Would borrowers be paid to borrow?
Unless depositors are charged to hold capital it is unlikely that borrowers would ever see the development of being paid to borrow!
Borrowers are charged higher rates than what savers are paid – this is how banks develop a margin – in the simplest of terms.
Would it mean that Banks end up offering more loans?
Potentially….. but a Bank depositing with the Reserve Bank remains risk free.
Lending money is not risk free – particularly if the economy is suffering – which is clear during this crisis.
Negative rates are likely to push depositors to search out alternative holdings for their deposits.
It is essential to understand the ‘Basket’ of risk – so an individual or entity doesn’t drift into a risk basket they don’t know or understand.
We often see investors describe their low risk holdings as Peer to Peer lending which is clearly absolutely incorrect!
The returns drive their decision making where only a ‘shock’ will provide the confirmation of risk.
The message is – we have the suitable solutions as Independent Financial Advisors.
If you require advice – get in touch.
Richard and Best Price FS Team