The Courier & Advertiser (Fife Edition)
Interesting times for savers as rates held at record low
Negative interest rates may become a reality but what will it mean? Allan Gardner, financial services director at law firm Aberdein Considine, explains
The Bank of England’s monetary policy committee has again held the interest rate at the record low of 0.1%.
This in itself is nothing earth-shattering, but there is mounting speculation about the possibility of negative interest rates coming our way.
Worst affected by such a drastic move would be savers with big balances, though negative rates could benefit those of us with a mortgage or who are investing in the stock market. The Bank expects a rapid rebound of the UK economy later this year as the Covid-19 vaccination programme rolls out, but it has also announced moves which could see a negative interest rate introduced if the recovery falters.
The central bank wants high street lenders to prepare for negative rates by July, in case there is a fresh downturn and its monetary policy committee needs to deploy them.
It has stressed that commercial lenders need at least six months to prepare, but insisted this does not mean negative rates are “imminent, or indeed in prospect at any time”.
How could savers be affected by negative interest rates?
Financial experts say those with a lot of money tucked away are most likely to be targeted with fees, as a bank account provides security that is hard to replicate for free. However, it’s thought most customers wont be charged for holding money in accounts.
Also, negative interest rates might not be all bad news for savers, as banks are always competing for market share – and consumers prepared to shop around may still find places with positive rates.
How would those with a mortgage be affected by negative interest rates?
There would be no impact on the majority of people, as most mortgages these days are fixed-rate deals. For those of us with a variable-rate mortgage, the rate could fall a little.
New deals out after any UK introduction of negative interest rates are unlikely to be interest-free.
Rates charged are likely to be limited by terms and conditions. The small print on a tracker mortgage, for example, may specify the rate will never fall into negative territory. Some countries have seen the introduction of mortgages with negative interest rates. Borrowers at one Danish bank were lent money at a rate of -0.5%.
How could stock market investors be affected by negative interest rates?
If you’re a saver, no interest paid by the banks means you’re more likely to invest money elsewhere.
One obvious route is to put your cash into the stock market. A flood of fresh money will increase demand for stocks – and that is certainly good news for share prices.
Anyone looking to make the most of their money should seek independent financial advice, where a proper strategy, based on a risk level you are comfortable with, can be drawn up.