NEGATIVE THINKING

Rosie MuRRay-West looks at the implications if the bank of england were to set negative interest rates

WE ARE all used to having interest paid to us when we put our money in the bank, while we pay out interest on the debts we hold. But this month the Bank Of England’s Monetary Policy Committee, which sets the Bank Of England’s interest rate, moved a step further towards negative rates for the first time.

The Committee, known as the MPC, said that it had been briefed on how to implement a negative rates policy, and had discussed the operational details with other banks. If the Bank Of England’s base rate turns negative, it could have an effect on the rates set by other banks as well.

Theoretically we could be paid to take out mortgages and loans, but would have to pay to keep our money in the bank.

It isn’t quite that simple, but experts say there will be changes to our finances if the Bank decides on a negative rate policy.

Nigel Green, CEO of financial advisory group deVere says that everyone should review their finances to check that they are ready for ‘a new era of likely permanently ultra-low – or even negative – interest rates’.

Here’s what you need to know...

Why is the Bank considering negative interest rates?

The Bank Of England cuts interest rates when it wants to stimulate the economy, and kick-start spending. Instead of incentivising people to keep money in the bank, it wants to persuade them to spend it. It also wants to persuade the banks to push increased amounts of money out into the economy in the form of loans and mortgages.

Interest rates are already very low – at a record 0.1 per cent – they cannot be cut much further without bringing them into negative territory. ‘The reasoning is that if depositors and the banks’ own deposits are “punished” from staying idle, some can be invested in the real economy,’ explains George Lagarias, chief economist at accountancy firm Mazars.

i don’t bank with the Bank of england. Why does the rate it sets matter to me?

High street banks such as Lloyds, Santander and Barclays are free to set the interest rates that they charge to savers and borrowers in any way they like, but the Bank Of England rate (often called Bank Rate) determines the rate that commercial banks are paid to hold money with the Bank Of England. As a result, it influences the rates that banks charge people to borrow money or pay on their savings.

Many savings and mortgage products have clauses in them that mean that they are directly linked to Bank Rate: when it falls, the rate on these products will fall, too. Others not directly linked will also be affected.

Have we had negative interest rates before?

Not in the UK. Other countries, including Denmark, Japan, Sweden and Switzerland, have had such a policy, but this would be the first time the Bank Of England has implemented it. Sarah Coles, personal finance head at Hargreaves Lansdown, says that because it is a new strategy, it would take a while to be implemented here. ‘Even if they do go negative it won’t happen overnight. Right now the Bank is exploring whether it would be realistic to introduce negative rates in the UK,’ she says.

‘This will include checking how long it would take the banks to change their systems to cope with it, and anyone who has ever had any dealings with a big high street bank knows this isn’t going to happen quickly.’

What will happen to my savings if Bank Rate becomes negative?

If you have savings in the bank, the interest rate that you are receiving is already likely to be pretty low. If rates go to zero or below, it’s possible that you could receive no interest at all, or even have to pay to deposit money.

‘Savers in the UK are able to safely deposit their cash into flexible accounts without cost right now, but this doesn’t mean that we couldn’t see holding accounts that charge in the future, if we were indeed to move into the territory of negative interest rates,’ warns Rachel Springall, finance expert at financial information group Moneyfacts.

‘It’s a model that would confuse your ordinary saver of course, but some savings accounts could go down this path – similar to how some banks charge a fee on a current account.’

However, if banks are still lending out money to mortgage borrowers and others at above zero rates, it may be possible to still earn interest on your cash, so paying to deposit your money safely is not definitely on the cards.

If interest rates are negative, it sounds

like those who want to borrow money, for example if they want a mortgage, will be paid for taking out a loan.

However, Ray Boulger, senior technical manager at mortgage broker John Charcol, says this is not the case. Even in Denmark, where there is a mortgage with negative rates, he says that the fees and other costs associated with the loan mean you will still pay.

However, rates on mortgages could drop for those who have already bought a house on a variable rate or ‘tracker’ mortgage, he says. That doesn’t mean you will be paying no interest, as most mortgages have a ‘floor’, so that even if the rate is negative, the rate you pay will be a certain number of percentage points above zero.

For new buyers, there may be some falls in interest rates, but Ray says that demand for mortgages has been artificially inflated by the government’s decision to bring in a stamp duty holiday, meaning that lenders may keep rates higher to ensure they don’t end up swamped with applicants.

Will it affect my credit-card bill?

Unlike mortgages, the interest rates charged on credit cards don’t tend to be directly linked to Bank Rate, so you are unlikely to see an instant change in the rates charged on your credit card or loan.

These tend to be far higher than mortgage rates as they are ‘unsecured’ credit – you cannot lose your home if you don’t pay them back.

‘Credit cards and personal loans are priced based on risk, so we are not likely to see vast interest rate cuts made in the unsecured lending arena,’ says Rachel at Moneyfacts.

‘As it stands the economy is still shaken and the UK is officially in a recession, so consumers may still rely on these deals if they are struggling financially.’