What are negative interest rates and can they help that….

Barclays Bank has announced it will be ready for negative interest rates after the Bank of England confirmed it was considering the option to see if it could help the economy through the coronavirus crisis.

The UK has never gone below zero rates before, but with rates already at an all-time low of 0.1%, policymakers have few tools left to offset the economic impact of the pandemic.

Here we look at the most important questions about the negative interest rate debate:

– What are negative interest?

A negative interest rate is when the base rate of a central bank falls below 0%.

The base rate determines how much interest the central bank pays to financial institutions that have money on them and what it charges for borrowing.

Do me a favor: please SHARE this post.

Lenders use the base rate to evaluate the interest on savings and the interest on loans and mortgages.

– Why is the Bank of England considering negative interest rates?

Since the financial crisis, many central banks around the world have already cut their base rates below zero, including the European Central Bank and its counterparts in Japan, Denmark, Sweden and Switzerland.

Negative interest rates have been used to bolster ailing economies and the bank is considering whether it can be used on those shores to help the UK cope with the impact of the pandemic and coronavirus lockdown restrictions.

– How does it help to stimulate economic growth?

The idea is to encourage banks to increase lending to households and businesses as the Bank of England would bill them to hold their money.

It is also designed to encourage households and businesses to spend instead of leaving money in their bank accounts where inflation would undermine value.

Another upside is that negative interest rates would make it cheaper for the government to borrow money, which would help lower the balloon bill for Chancellor Rishi Sunak’s Covid-19 buying spree.

– What would negative interest rates mean for savers?

While banks would be charged for keeping their cash with the central bank, it is highly unlikely that retail savers would have to pay a deposit fee.

Competition in the market is widely seen as preventing this problem as banks do not want to lose the savings business.

However, it is expected that large companies will pay fees on deposits, while some countries with negative interest rates will charge fees for savings above a certain amount.

– What about mortgage borrowers?

Borrowers can enjoy the prospect of getting paid to take out a loan, but this may not be a reality for most.

In Denmark, a negative interest rate mortgage was taken out last year, giving borrowers 0.5% per year for taking out a 10-year loan.

However, experts consider this to be very unlikely in the UK mortgage market.

For most UK borrowers, a negative base rate means little with so many doing fixed income deals.

Those with tracker mortgages are likely to pay a minimum interest rate that will keep interest payments from ever dropping below zero.

– What are the disadvantages of negative interest?

A major concern is that subzero interest rates can depress bank revenues by narrowing the gap between loans and withdrawals.

This could potentially affect their ability to lend and adversely affect the stability of the UK financial system.

As seen in the financial crisis, it is vital for the entire global economy to maintain bank lending.

There is also concern that a negative interest rate environment might encourage savers to withdraw their deposits and instead tuck their money under the mattress.

This, in turn, could affect UK banking profits and financial stability.

– Are we likely to see negative rates soon?

The bank wrote to all of the major lenders and building societies on October 11, asking if they would be ready should interest rates turn out to be negative, fearing that doing so could destroy their systems.

Banking systems are not set up to cause interest rates to drop to zero or below because they are designed for positive values.

It would likely take weeks for banks to prepare their systems while the bank itself is still investigating whether or not the side effects outweigh the benefits of negative interest rates.

The bank’s chief economist said it would take many months to complete the bank’s investigations into the feasibility of negative interest rates and did not suggest that the instrument should even be considered on those shores until 2021 at the earliest.

Share on facebook
Facebook
Share on pinterest
Pinterest
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on email
Email

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.