United Kingdom

Will negative interest rates be forced on us? UK could make savers PAY banks to hold their cash 

Savers could soon have to pay to keep their money in a bank if negative interest rates are enforced.

Many have suffered negligible rates for more than a decade and most high street banks now pay a pittance at 0.01 per cent.

But experts last night said rewards for starved savers could fall even further still after the Bank of England hinted interest rates could go below zero for the first time ever.

But experts last night said rewards for starved savers could fall even further still after the Bank of England hinted interest rates could go below zero for the first time ever

Negative rates have been adopted by Japan and the eurozone in a bid to encourage spending. 

Silvana Tenreyro, of the Bank's monetary policy committee, said this weekend that there was 'encouraging' evidence the policy could fuel a recovery in the virus-ravaged economy.

A negative base rate would mean the Bank of England would charge banks and building societies to hold money – a cost that could be passed on to customers.

The Bank set the base rate at an all-time low of 0.1 per cent in March in an effort to boost the economy in the face of the pandemic. 

Interest rates paid on savings have plummeted since. 

Rachel Springall, from data firm Moneyfacts, said: 'Savers might feel like interest rates couldn't possibly go any lower – but they would be wrong.'

Andrew Hagger, of personal finance website MoneyComms, said: 'If negative interest rates were introduced, it would decimate an already depressed savings market with a tsunami of rate cuts.'

Tom Selby, an analyst at investment broker AJ Bell, said negative rates could drive desperate savers to gamble on the stock market. 

He said: 'A rate cut will be another body blow for savers who are already struggling to get a decent rate. 

'Indeed, getting any kind of return at all on your money may become all but impossible unless you are willing to take some stock market risk.'

But negative rates should provide relief to struggling borrowers, who could see the interest payments on debts such as mortgages fall.

Anna Bowes, of advice website Savings Champion, said banks could start to charge savers in the way that some current accounts charge a fee. 

However, she said there would likely still be 'plenty' of providers keen to raise money from savings customers. 

National Savings and Investments (NS&I) last week announced a raft of brutal rate cuts that will hit its 25million customers – including those who hold Premium Bonds.

Yesterday Bank of England deputy governor Dave Ramsden voiced opposition to setting negative interest rates.

'We're not about to use [negative rates] imminently. 

'I see the effective lower bound still at 0.1 per cent, which is where Bank rate is at present,' he told the Society of Professional Economists.

 Commentary by Ruth Sutherland

The concept of negative interest rates – where debtors are rewarded and thrift is punished – sounds far too crazy to be a serious policy measure.

Until, that is, you consider that the biggest borrowers are governments, not least our own.

Public borrowing has ballooned due to coronavirus and pushed the prospect of negative rates to the top of the agenda. 

Chancellor Rishi Sunak ran up an overdraft of nearly £36billion last month alone, taking our total national debt to more than £2trillion.

Hence, the drip feed of recent hints from the Bank of England that it might slash borrowing costs below zero in the hope of salvaging our debt-raddled economy.

What the economists advocating this policy do not spell out, however, is the impact on savers, who are once again being treated with contempt.

Chancellor Rishi Sunak (pictured) ran up an overdraft of nearly £36billion last month alone, taking our total national debt to more than £2trillion

For most people, the very thought of negative interest rates is perplexing.

Does it mean the bank actually pays us to take out mortgages and that we have to stump up for our savings accounts? Not quite.

It does, however, lead us through a portal into a topsy-turvy world of Alice in Wonderland economics.

A negative rate policy works like this. Commercial banks are compelled to hand over fees for any cash they keep at the Bank of England, above the minimum they are obliged to stash away for safety reasons.

This is supposed to encourage them to lend more money, which in theory should fuel growth in the economy.

The jury is out on whether it is effective. Negative rates have been deployed in some major economies in recent years including the eurozone and Japan, neither of which have been a roaring economic success story.

As a policy, it is confusing and disorienting, which in itself reduces confidence. What it would mean for borrowers and savers in practical terms depends on how the banks react. 

In other countries there have been cases of below-zero mortgage rates, including a home loan charging minus 0.5 per cent in Denmark.

The Danish bank does not actually pay borrowers a cheque in interest payments every month, it knocks the amount off the debt. 

On a £100,000 mortgage, for example, the debt would fall by £500 in the first year even with no repayments.

This is not likely to happen in the UK. Many borrowers are on fixed rates which stay the same no matter how base rates fluctuate. 

Most tracker products, which are also popular, have a clause in the small print stopping them going negative.

Banks will be very reluctant to charge people to deposit money for fear of widespread outrage.

Even so, there is no doubt negative interest rates would be an unmitigated disaster for the thrifty.

There is no get out of jail free card for our heavily indebted government, whether that be negative rates or another cunning plan. 

It is savers – already the innocent victims of the financial crisis of 2008, which ushered in years of ultra-low interest rates – who will pay the price.

One danger is that they will start to keep their money under the mattress, or sidestep the mainstream banks and shift into cryptocurrencies such as Bitcoin.

We HAVE already seen thousands turning in desperation to risky investments such as those touted by the disgraced financier Neil Woodford.

One might argue that negative rates have been with us for some time, in all but name.

In real terms, after taking account of inflation, savers have been losing money on most accounts for years. 

But cutting to below zero would send out a powerful message that anyone aspiring to build a nest egg is at the bottom of the priority list.

We have to ask what kind of values that promotes.

It isn't just savers who would be hurt. Sub-zero rates would also risk undermining the profitability of our country's banks.

I won't detain readers with the technicalities but suffice it to say that when interest rates are low, it is harder for banks to make a profit – and when they are below zero, it is more difficult still.

The dire state of many banks in the eurozone and Japan is ample testament to that.

Our high street lenders neither attract nor deserve much sympathy but the last thing we need in the middle of this pandemic with firms struggling to survive is an enfeebled banking system.

Setting up incentives for even more borrowing is also deeply questionable. 

The reason this country has been so hard hit economically by Covid-19 is that many firms and households went into the crisis with heavy debts and very little in the way of savings.

Pushing them to go deeper into the red is not the solution.

The even more profound concern with negative rates is that they are leading us further down the path of mind-bending measures.

We have already seen money printing on a vast scale through quantitative easing. It was introduced in the financial crisis and is being ramped up in the pandemic.

Now, having flooded the system with cheap money, there is nowhere to go but through the looking glass to a realm where the normal rules of economics are inverted.

For centuries it has been a basic principle that if you want to use someone else's money, you should pay for the privilege.

By the same token, if you are a saver, and you are foregoing the use of your own cash for a time, then you expect to be compensated.

These are the foundations on which our banking system and modern capitalism itself have been built.

Negative interest rates threaten to undermine all of that.

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