Negative interest rates a step too far
The idea of paying a bank to keep your money isn’t the British way, says Ian Handford
THE thought the Bank of England could introduce a negative interest rate against high street bank lending would impact on all personal and business bank credit accounts, creating a truly “negative” action against bank customers. To envisage having to pay interest on a “credit balance” in essence means being charged for loaning your own money to the bank, its almost beyond belief.
Brits on the whole are fair sensible people who of course like a bargain, but to imagine they will let banks charge interest and likely a service charge, for keeping their cash at the bank will be a step too far. Any charges incurred would be like constantly dipping into your own capital reserve, for no other reason that you retained the security of the bank.
If forced to withdraw your “credit balance” from the bank, in order to gain more money, seems ridiculous. We all realise that the central banks could technically run out of money, while constantly trying to stimulate a national economy, which is why negative interest became a possibility. It was in 2009 that Sweden’s Central Bank cut its overnight deposit rate to –.025% making it the first institution in the world to operate negative rates. Five years later their action was mirrored when the European Central Bank (ECB) lowered its rate to –.01%, followed soon after by other European countries and even Japan who now operate negative interest rates.
Thankfully for the British, our Governor of the Bank of England (BOE) Andrew Bailey followed by his Deputy Sir Dave Ramsden, both spoke out against introducing negative interest. Their statement came in spite of a number of so-called “experts” in the private sector and financial world who believed the BOE had exhausted its bond-purchasing potential (quantitative easing or QE) being one of the bank’s main alternatives to further reducing bank interest rates.
For individuals and business owners who keep cash readily available in a current or easy access account at a high street banks, this will usually be for paying items on the “hoof” or household or business invoices etc. To imagine that this cash, payable on demand could be caught up in negative interest payment and/or extra service charges, is to me beyond belief. For those savings not on fixed interest rates, or credit cash accounts available on demand, to be subject to payment of negative interest is a step too far.
But action is not called for at present, as it still makes sense to retain your personal and/or business cash as a liquid asset at the bank, as it remains the safest, secure yet guaranteed method of keeping your demand money available. Currently, bank charges on credit accounts are minimal even for business accounts because we are in a very difficult financial climate. Bank rates and announcements should be monitored regularly, particularly if substantial cash balances are held. The NS&I with a Treasury guarantee makes it still one of the safest institutions offering easy access, although there are others in the private sector who offer better rates. For regular Savers, ISA holders and even Income Bond users, around 1% or more interest, can still be found, although from December 2020 the NS&I is decreasing its rate to 0.01-0.15% per annum which although low is still better than being penalised by a negative rate.
If we accept the average Brit will never pay banks for holding their cash, then what is the alternative? Trading off the security aspect as happened years ago, when many of the populace kept their wealth “under the bed” is no longer a suitable way forward. Yet if the UK economy continues to suffer from because of the “coronavirus” we should all appreciate this nightmare could last a long time. The problem for individuals and businesses, plus to some extent savers, who wish to keep an availability of cash on demand, is that they also do not want to pay negative interest or added charges. As an ardent fan of cash payment cash to me has always been king.
Government may have the answer, by using another weapon in their armoury – legislation. To keep the British economic model working, maybe legislation could be enacted to regulate the banks so that there were minimum rules used before negative interest and/ or charges were made. By risking that every cash/credit account in the UK might be closed could be a disaster. A report by the National Audit Office has highlighted that £50bn banknotes have already gone missing from the British economy and the last thing Government now needs, is to risk £billions more of cash withdrawal, when ultimately the final destination of the now liquid cash is unknown.