The impact of negative interest rates on the economy and public

THE BANK of England confirmed it is looking at the option to see whether it could help the economy through the coronavirus crisis.

The UK has never before taken rates below zero, but with rates already at the historic low of 0.1 per cent, policymakers have few tools left in the box to help offset the economic hit from the pandemic.

Barclays Bank has said it would be ready for any negative interest rates, but what they mean for the economy and bank users?

Here we look at the key questions surrounding the negative interest rate debate:

■ What are negative interest rates?

A negative interest rate is when a central bank’s base rate goes below 0 per cent. The base rate determines how much interest the central bank pays to financial institutions that hold money with it, and what it charges them to borrow.

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

Since the financial crisis, many central banks around the world have already taken their base interest rates below zero. Negative rates have been used to bolster flagging economies and the Bank is looking at whether it could be used on these shores to help the UK weather the impact of the coronavirus pandemic.

■ How does it help boost economic growth?

The idea is to encourage banks to increase lending to households and businesses, because the Bank of England would charge them money to hold their cash. It is also designed to spur households and businesses on to spend, rather than leave money in their bank accounts, where the value would be eroded by inflation.

■ What would negative interest rates mean for savers?

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

Competition in the market is widely seen as preventing this from happening, as banks would not want to lose savings business, but big companies could well be expected to pay fees on deposits.

■ What about mortgage borrowers?

Borrowers may get excited about the prospect of being paid to take out a loan, but this may not be a reality for most. For most British borrowers, a negative base rate will mean little as so many are on fixed- rate deals. One major concern is that sub- zero rates can squeeze bank earnings.