Putting your spare cash into a savings account where it earns interest has been the foundation of prudent financial management for generations. But since the economic crisis of 2008 saw the Bank of England Base Rate fall to 0.5%, banks and building societies struggled to offer returns that keep pace with inflation, which at times passed the 3% mark.
The reduction in the Base Rate to an historic low of just 0.1% in March made the situation even worse – and things might not stop there. There is speculation that interest rates could turn negative.
We look at what this might mean for you and your savings.
Why negative rates?
Cutting interest rates can bolster an economy struck by recession, making it easier for businesses and individuals to borrow.
But with rates already close to zero, the Bank has a problem if the economy needs a boost in the face of a second wave of Covid. With no room left to simply reduce rates, it would have to take them into negative territory.
Sadly, although it would seem the logical result of a negative rate, banks are unlikely to pay us to borrow from them. Business borrowers may see a reduction in their rates, but most banks will have closed loopholes that in the last credit crunch saw some borrowers with tracker mortgages have no interest to pay.
Negative interest rates could be a very real prospect. Central banks in Denmark and Switzerland have already set negative rates, and some UK challenger banks have dropped interest rates for personal account customers below zero – although only for those who hold high balances in euros.
What happens now?
Negative interest rates are by no means a certainty. They would be unprecedented in the UK, and the disruption they would cause might be resisted by financial decision makers. The Bank of England’s Monetary Policy Committee is responsible for setting interest rates, but it has other economic controls that it can bring into play, such as quantitative easing – the creation of new money – to stimulate a troubled economy.
But the possibility that the bank will charge you for looking after your money has to be considered. Saving is already costing you money in real terms, because returns are eaten up by inflation.
What can you do?
If you depend on income from your savings or simply want your money to grow, it could be time to start looking at investments.
With investment, your money does not stay as cash, and instead is used to buy something, such as a share or a bond that can deliver an income or appreciate in value. Returns are not limited by interest rates – which means that your money could start generating the return you need again.
Of course, there is a downside, an Investment can fall as well as rise in value, and does not have the same capital security as a deposit based account , however, most types of investment business is covered up to a maximum of £85,000 under the FSCS compensation scheme.
The best way to avoid this risk is to get expert advice from a Continuum investment expert. We can help you find investment solutions that offer the levels of return and the measure of security you need.
With our help regular investment can be as simple as saving – and much more rewarding.
Whether or not interest rates are going negative, a call to us could make your financial outlook seem a great deal more positive.
Find out more about what we can do for you now.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
Equity investments do not afford the same capital security as deposit accounts.
Your home may be repossessed if you do not keep up repayments on your mortgage
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