Bank of England possibly resorting to negative interest rates: A step too far?

[brad465]

There's been speculation that the Bank of England is considering lowering it's interest rate into negative territory, which is backed up by news today they are contacting banks about the technical aspects this would involve:

Bank of England questions banks over negative rates

The UK would be following in the footsteps of countries like Japan if it cuts the cost of borrowing.

www.bbc.co.uk

The Bank of England has written to UK banks asking them how ready they are if interest rates were cut to zero or turned negative.

The UK would be following countries such as Japan and Switzerland if it cut borrowing costs to such a low figure.

"We are requesting specific information about your firm's current readiness," the bank's deputy governor, Sam Woods, said in the letter to banks.

The Bank of England cut rates to the current historic low of 0.1% in March.

Mr Woods said he wanted to know if the banks would face technological challenges if rates should turn negative.

I can see several problems with this, notably that if this happens we can expect a repeat of the Northern Rock closures, but of a much higher magnitude, where many savers want withdraw their savings to resort to "under bed storage" in anticipation of having to pay for saving with their high street bank.

However my main grievances are not specifically with the concept of negative rates, but this concept highlights just how messed up the world economy is (the beginning of the end of capitalism?), that other central banks (inc. European and Swiss) have resorted to negative rates and many others like ours have kept them at historically low levels for far too long. What this has done is, in combination with relentless Quantitative Easing (QE), continuously inflate the property market, stock markets and other assets as a result of investors looking for better returns elsewhere from savings' accounts. This in turn has made life even harder for first time buyers, while also driven an increase in inequality as their policies of the last decade favour the super-rich with large asset portfolios, while leaving poorer groups discouraged from saving and/or building up piles of supposedly cheap debt.

What's worse I think is the Bank of England's desire to encourage consumers to spend and borrow to do so, which has and is creating a viscous cycle of debt build-up, both in public and private debt, while going against what I believe is the common teaching growing up that saving is important and borrowing is "one's worst money enemy", so should be avoided as much as possible. This highlights how much our economy is driven by consumerism, which, in our world of environmental destruction and climate change that this behaviour is driving, is an unsustainable practice. Furthermore as the economy goes into a likely depression caused by the world Covid-19 response, more people will be reluctant to spend where avoidable, either as a result of losing their job or the fear of losing it. In short I believe many bubbles are being inflated that have been for so long, which on bursting is going to be a disaster.

What do others think about this negative rates' concept and their overall policy?

 

[A Challenge]

I don't think negative rates are a good idea, but I can sort of see why the Bank may be interested. I don't think that many small-scale personal customers would find their rates going negative, though they may be 0.01% across the board easy access and less than 0.5% for a fixed rate (currently highest are about 0.95% and 1.5%). It's even more unlikely for borrowers. This also won't affect inflation, which is what makes the difference as to whether savings rates mean you are losing money or not.

 

[GRALISTAIR]

I think I will empty my UK bank account if this happens and convert to premium bonds!

 

[JamesT]

I think I will empty my UK bank account if this happens and convert to premium bonds!

National Savings have already started dropping their rates. It’s currently the equivalent of 1.4%, but will drop to the equivalent of 1% from December. (Of course that’s an average, my Premium Bonds have never won a penny in almost 40 years). I’d bought into their Income Bonds as their 1.16% rate was market leading a few months ago, soon that’s dropping to 0.01% so utterly pointless.

 

[GRALISTAIR]

National Savings have already started dropping their rates. It’s currently the equivalent of 1.4%, but will drop to the equivalent of 1% from December. (Of course that’s an average, my Premium Bonds have never won a penny in almost 40 years). I’d bought into their Income Bonds as their 1.16% rate was market leading a few months ago, soon that’s dropping to 0.01% so utterly pointless.

Wow I have won 4 prizes this year alone!

 

[Busaholic]

National Savings have already started dropping their rates. It’s currently the equivalent of 1.4%, but will drop to the equivalent of 1% from December. (Of course that’s an average, my Premium Bonds have never won a penny in almost 40 years). I’d bought into their Income Bonds as their 1.16% rate was market leading a few months ago, soon that’s dropping to 0.01% so utterly pointless.

Most of my Premium Bonds were bought in 1969, though I topped them up in the 1970s. Never sold one, and have kept my current address details up-to-date. I too have 'won' absolutely zilch over that period: in fact, if I was ever to get a letter I'd probably die of shock before being able to claim any prize.

 

[yorksrob]

I think it's a great idea, so long as my mortgage gets a negative interest rate as well.

No, didn't think it would.

 

[DelayRepay]

I think it's a great idea, so long as my mortgage gets a negative interest rate as well.

No, didn't think it would.

Most mortgage terms contain a condition saying the rate will never go below x%, irrespective of the BoE rate.

Also remember that most mortgages include a margin above the BoE rate. If your mortgage is base + 1%, the BoE rate would have to drop below -1% before your mortgage is negative.

So the reality is mortgage rates won't go negative. A few lucky people with really old mortgages will probably find themselves paying no interest, but most modern mortgage contracts have the possibility of negative rates baked in (we went through this a few years ago after the Brexit vote, and in the last financial crisis). Most other consumer borrowing e.g. credit cards are not directly tied to base rate anyway.

So for consumer borrowers, I see little impact. Savers will probably see further cuts but I can't see any bank wanting to be the first to impose negative rates.

 

[yorksrob]

Most mortgage terms contain a condition saying the rate will never go below x%, irrespective of the BoE rate.

Also remember that most mortgages include a margin above the BoE rate. If your mortgage is base + 1%, the BoE rate would have to drop below -1% before your mortgage is negative.

So the reality is mortgage rates won't go negative. A few lucky people with really old mortgages will probably find themselves paying no interest, but most modern mortgage contracts have the possibility of negative rates baked in (we went through this a few years ago after the Brexit vote, and in the last financial crisis). Most other consumer borrowing e.g. credit cards are not directly tied to base rate anyway.

So for consumer borrowers, I see little impact. Savers will probably see further cuts but I can't see any bank wanting to be the first to impose negative rates.

Surprise Surprise, Didn't need Cilla to announce that one.

 

[GB]

Would have thought an across the board cut to the 20% VAT rate would be more beneficial?

 

[Tetchytyke]

Would have thought an across the board cut to the 20% VAT rate would be more beneficial?

It depends. If you're wanting to shore up businesses, then yes. If you're wanting to encourage more spending then no.

VAT cuts are rarely passed on to the consumer- certainly here, restaurants aren't charging any less than before, despite the VAT being cut to 5%. So if you need the businesses to have the extra revenue it works, but if you're wanting lower prices to encourage spending it doesn't.

We saw that when Labour cut the rate to 15% it didn't result in price cuts, but when the Tories put it up to 20% it did result in price rises.

 

[3rd rail land]

It depends. If you're wanting to shore up businesses, then yes. If you're wanting to encourage more spending then no.

VAT cuts are rarely passed on to the consumer- certainly here, restaurants aren't charging any less than before, despite the VAT being cut to 5%. So if you need the businesses to have the extra revenue it works, but if you're wanting lower prices to encourage spending it doesn't.

We saw that when Labour cut the rate to 15% it didn't result in price cuts, but when the Tories put it up to 20% it did result in price rises.

Not surprising at all. Businesses are usually very slow to pass on saving to consumers. That's if they pass the savings on at all.

As for negative interest rates it won't benefit consumers. As mentioned already mortgages have terms which will prevent negative rates and bank will all but reduce interest rates in savings accounts or possibly charge people to store money in their accounts. Some people will remove their money from bank accounts and keep the funds in £50/100 notes in their home. Personally I wouldn't want to have 1000s of pounds lying around in my flat.

 

[Tetchytyke]

Not surprising at all. Businesses are usually very slow to pass on saving to consumers. That's if they pass the savings on at all.

And with the struggles facing hospitality, I think that's fair enough. But without cheaper prices you won't encourage spending.

That said, VAT should never have been put up to 20% in the first place.

 

[ainsworth74]

As mentioned already mortgages have terms which will prevent negative rates and bank will all but reduce interest rates in savings accounts or possibly charge people to store money in their accounts. Some people will remove their money from bank accounts and keep the funds in £50/100 notes in their home. Personally I wouldn't want to have 1000s of pounds lying around in my flat.

I'll probably just chuck it all on the stock market and trust my fate to the hands of high finance! I'm sure that won't go wrong at all...

 

[Starmill]

OK let's all try and sort this out a bit.

The central bank, in this case the Bank of England, is in charge of monetary policy. The department of the treasury, in this case mainly driven by the Prime Minister and his advisors rather than Her Majesty's Treasury, is in charge of fiscal policy. You need policy responses in both areas.

Negative interest rates could involve charging banks who are keeping cash in their Bank of England account. That's all the European Central Bank have done. It's very unlikely indeed to result in there being a savings account or current account for consumers charged at negative rates. The main aim of the policy is to encourage the banks to make loans with their money rather than leaving it in cash. In any case, the Bank have said that they aren't going to use it quite yet. But there's little point in them having it as a potential tool if they don't know if it works, hence the new letters.

Monetary policy is try to concern itself with how fast money is moving throughout the economy. If you imagine you earnt money in cash and burnt it, or kept it under your mattress and never spent it, that would be '0'. If you spent all the money you earnt as soon as you received it, that would be '1'. In between you'd have money in a current account, close to zero, money in a 5 year fixed term savings account, also close to zero but further away than the current account, then things like peer-to-peer lending and stocks more in the middle. Flip it around for thinking about borrowing. Lowering the interest rate is supposed to make saving less attractive and investment more attractive. Moving your money from cash to investment accounts or using it to fund peer-to-peer lending will therefore 'speed it up' a little bit (although not as much as if you'd spent it). The reverse for borrowing - more money available to lend meaning cheaper borrowing. This is what negative interest rates would be try to achieve.

Fiscal policy responses such as changing tax rates will have different effects. They are different levers for different jobs. As it happens the real answer is not to worry so much about monetary policy and get spending money. The public either can't or are too scared to, so the government must. There's no financial constraint (only an inflationary one which won't be a risk for some time), the Treasury can and does borrow the money from the Bank of England. The money will exist only because it is spent. Get on with it.

National Savings have already started dropping their rates. It’s currently the equivalent of 1.4%, but will drop to the equivalent of 1% from December. (Of course that’s an average, my Premium Bonds have never won a penny in almost 40 years). I’d bought into their Income Bonds as their 1.16% rate was market leading a few months ago, soon that’s dropping to 0.01% so utterly pointless.

I hope you opened an account quickly enough with Coventry Building Society! I knew being an existing customer of theirs would come in handy at some point or other

 

[Typhoon]

I hope you opened an account quickly enough with Coventry Building Society! I knew being an existing customer of theirs would come in handy at some point or other

Consistently in Best Buy tables in good times and bad as opposed to some of those who might as well be based in Timbuktu. A wise choice!

What I like about them is that they enable you to look at better (and worse) paying products on their website. Unfortunately nearest branch a tad under 100 miles away for me!

Main description: you should be on Moneybox!

 

[_toommm_]

Interestingly my bank (Natwest) has just announced a 3% interest Digital Saver account, so they seem to be bucking the trend by quite a bit!

 

[Typhoon]

Interestingly my bank (Natwest) has just announced a 3% interest Digital Saver account, so they seem to be bucking the trend by quite a bit!

Regular savings accounts are often decent payers. There are one or two conditions that would prevent some from signing up - you must have a NatWest current account, maximum amount you can save each month is £50 so they are giving out £9.88 for the first year, you need to set up a standing order for the amount (some institutions allow you to vary the amount but not here), and most importantly, once you hit £1000 you close the account or withdraw some of the money because interest on amounts over £1000 attracts 0.01%.

Like most accounts, it is designed for some people and not others - someone just wanting to get into the savings habit, yes. Pretty good for those wanting to save for Christmas, actually!

 

[Busaholic]

It depends. If you're wanting to shore up businesses, then yes. If you're wanting to encourage more spending then no.

VAT cuts are rarely passed on to the consumer- certainly here, restaurants aren't charging any less than before, despite the VAT being cut to 5%. So if you need the businesses to have the extra revenue it works, but if you're wanting lower prices to encourage spending it doesn't.

We saw that when Labour cut the rate to 15% it didn't result in price cuts, but when the Tories put it up to 20% it did result in price rises.

Of course, when the VAT had to be shown as a separate amount added at x% you couldn't legally get away with that, but doubtless that'd now just lead to the ex-VAT price being adjusted to form the same amount in total.

 

[Furrball]

Of course, when the VAT had to be shown as a separate amount added at x% you couldn't legally get away with that, but doubtless that'd now just lead to the ex-VAT price being adjusted to form the same amount in total.

The VAT cut was not intended to be passed on to the customer - it was to aid the business. The customer got the eat out to help out offer

 

[Busaholic]

The VAT cut was not intended to be passed on to the customer - it was to aid the business. The customer got the eat out to help out offer

it is and was entirely up to the business concerned whether they passed the VAT cut on - Morrisons cafes and some Costas, including my local pair, chose to pass it on and continue to do so. The GOV.UK website on the subject, created at the time, makes no mention of whether the reduction should or should not be passed onto the customer, so I feel your first statement is merely your opinion. In other words, I'm ignoring any political 'spin' put on it.

 

[PeterY]

I'd better get a bigger mattress I can see people taking out their money.

 

[Roast Veg]

OK let's all try and sort this out a bit.

The central bank, in this case the Bank of England, is in charge of monetary policy. The department of the treasury, in this case mainly driven by the Prime Minister and his advisors rather than Her Majesty's Treasury, is in charge of fiscal policy. You need policy responses in both areas.

Negative interest rates could involve charging banks who are keeping cash in their Bank of England account. That's all the European Central Bank have done. It's very unlikely indeed to result in there being a savings account or current account for consumers charged at negative rates. The main aim of the policy is to encourage the banks to make loans with their money rather than leaving it in cash. In any case, the Bank have said that they aren't going to use it quite yet. But there's little point in them having it as a potential tool if they don't know if it works, hence the new letters.

This is quite right. There's no reason to withdraw any money even if rates do go negative, unless you plan on gambling with forex.

 

[The Ham]

I'd better get a bigger mattress I can see people taking out their money.

The problem with that is that for many people the cost of keeping their money in an account would be low, but would cause them issues over dealing with their personal finances (such as direct debits).

Obviously someone with a large amount of savings may think differently, but then there's likely to be someone who would offer 0% so people would use that.

If course the other side of things is there were negative savings rates is that then the banks would have no money to lend, so the measure would be counter productive.

 

[Tetchytyke]

If course the other side of things is there were negative savings rates is that then the banks would have no money to lend, so the measure would be counter productive.

The banks have money to lend, that is the whole point of quantitative easing. The issue is that they are stockpiling it. Lending criteria are getting stricter, lending interest rates are going up, promotional periods on credit cards are getting shorter. Small businesses are struggling to borrow, even though these loans are underwritten by government.

The point of a negative interest rate is to stop banks sitting on money by making it cost them money. I'd genuinely be amazed if personal banking rates dropped below zero, even if base rates did.

 

[221101 Voyager]

I don't have an issue with 0.00% interest, but I agree taking peoples money by going negative is crazy! As others have said I think storing cash under floorboards and or beds is about to potentially become a common thing if this decision goes ahead!

Don't people lose enough of their hard earned savings with all the dozens of taxes imposed on it already!?

 

[plugwash]

How negative do interest rates have to go before banks decide that keeping cash in their vaults is a better bet than depositing it at the central bank?

 

[AM9]

How negative do interest rates have to go before banks decide that keeping cash in their vaults is a better bet than depositing it at the central bank?

Including increased insurance policy costs for the business.

 

[brad465]

How negative do interest rates have to go before banks decide that keeping cash in their vaults is a better bet than depositing it at the central bank?

If the Bank of England and/or the Government want to stop entities holding onto their money they should do something about all the billionaire tax avoiders hoarding their wealth in our tax havens and in property that has seen their wealth rocket because of Bank of England policy causing many to seek the property market for better investment returns, combined with inflating assets through their extensive QE. Even the BoE themselves admitted in 2012 their policies were benefitting the richest most.

(I expect though there are too many vested interests about to prevent the above happening anytime soon)

 

[BluePenguin]

Speaking of negative interest rates, I have created a thread about some alternatives offering interest much greater than 0. Feel free to give your opinion and discuss. Click here