Anna Bowes: What impact would negative interest rates have on cash savers?

The Coronavirus pandemic has put huge pressure on economic growth, inflation and interest rates. Interest rates are already at record low levels but could they go further? As we head well into the second half of 2020, more questions are being asked about the possibility of the Bank of England (BoE) implementing negative interest rates. But what will this mean for our savings?
Negative interest rates could mean that the banks and building societies would have to pay to keep money on deposit with the Bank of England, however it's unlikely that they would charge all customers on their savings.Negative interest rates could mean that the banks and building societies would have to pay to keep money on deposit with the Bank of England, however it's unlikely that they would charge all customers on their savings.
Negative interest rates could mean that the banks and building societies would have to pay to keep money on deposit with the Bank of England, however it's unlikely that they would charge all customers on their savings.

Why might we experience negative interest rates?

In response to the pandemic, the Government adopted a quantitative easing (QE) programme, the expansionary monetary policy that allows central banks to pump new money into the economy to encourage UK companies to quickly rebuild their supply levels.

The demand side-shock is more difficult to fix in the short term due to the ever-growing uncertainty which is looming over our heads – meaning more of us may be cautious about spending our money right now. Quantitative easing does not automatically create inflation, as the government is issuing the new money supply in return for less liquid assets.

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Inflation fell to a five-year low of 0.2 per cent in August 2020, significantly lower than the BoE’s 2 per cent target.

As inflation is a key considera-tion when the Monetary Policy Committee (MPC) sets the interest rate, it could mean, in theory, that interest rates could fall below 0 per cent in the coming months.

And in fact the Bank of England has signalled on more than one occasion that it may take the cost of borrowing to below zero.

If this were to happen, it will be the first time in the BoE’s 325-year history but it’s not completely unfamiliar territory as some of our European neighbours have experience of this.

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The idea behind dropping interest rates below zero is that you will be charged to save although the reality of course may be somewhat different. Ultimately, it is an act of trying to get us to spend and borrow more to stimulate the demand that the economy is currently lacking.

However, banks may be reluctant to transfer on the cost of negative interest rates to their customers because it may encourage them to remove their savings from their accounts. This would mean banks would have reduced profits from the extra cost they are taking on.

If they did transfer the extra cost of negative interest rates to the customer, it would be likely that they will scare people away from saving.

Both of these scenarios have direct pressure on banks profit levels. The less profits they generate, the less cash they have in reserve and therefore the less they have to lend. This is exactly the opposite of what the policy would be intended to do.

What will negative interest rates mean for cash savers?

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Negative interest rates could mean that the banks and building societies would have to pay to keep money on deposit with the Bank of England, however it’s unlikely that they would charge all customers on their savings.

That said, the high street banks are already paying as little as 0.01 per cent on easy access accounts – so there is little wiggle room to cut rates further. Could they start to charge customers on their savings?

If they did this, it could be the catalyst to get loyal savers to move their money from their bank. However, the worry is that if they do withdraw their funds, they keep it stashed under the metaphorical mattress, which would create a big security risk.

Hopefully it won’t come to that though, as there are likely to still be plenty of savings providers who will be keen to continue to raise money from savings customers.

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So, we’d expect to see accounts still available which pay at least some interest – but it’s more likely that these will be providers that are relatively unknown.

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James Mitchinson

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