The economy is being freed from the paralysis of lockdown, but the financial hangover remains. The Chancellor has already announced dramatic measures to help, but generous though his VAT cuts and Stamp Duty holiday may be, they may not be enough to get businesses back on their feet.
Negative interest rates have been used in other countries to provide an extra boost in difficult financial circumstances. The governor of the Bank of England, Andrew Bailey, has suggested that negative interest rates were being considered.
At Continuum, we are asking what exactly negative interest rates are – and what they mean for your own financial arrangements.
What are negative interest rates?
Interest rates are one of the main tools the Bank of England uses to regulate the economy. The bank raises interest rates when the economy becomes overheated to help prevent inflation, making borrowing by consumers and businesses more expensive. It lowers interest rates in a downturn because it encourages borrowing and spending, which stimulates the economy.
Usually, the Bank of England will pay interest to banks which deposit money with it. When rates turn negative, it will in effect charge a holding fee for looking after cash – making leaving cash on deposit very unattractive.
But with the Bank of England base interest rate at just 0.1%, there is little room to drop it any further without going into a negative rate – somewhere below 0%.
Negative rates make it costly to hold onto money, incentivising spending – but they reduce the cost of borrowing, for businesses and consumers alike.
What would negative interest rates mean for you?
If negative interest rates do come, they may have a positive effect on the economy as a whole, but what about the effect on your personal finances?
As usual there will be winners and losers. Winners will of course be the borrowers, who will find that borrowing costs less.
Businesses find it costs less to invest in new equipment and stock, and create jobs, stimulating the economy. Those of us with a mortgage could also benefit, particularly if we have a tracker, with the repayment rates we pay tied to the base rate.
Sadly, most tracker mortgages have a clause setting a floor in the rates they can charge.
A little extra cash in our monthly budgets will be welcome and could also help stimulate spending.
But the effect on savers would be serious. Interest rates are already low. A negative BOE base rate might not mean in practice that you would need to pay the bank to keep money in your savings account, but there may be opportunities that lie elsewhere.
What should you do?
It is far from certain that negative interest rates are coming, but it might be wise to be prepared, particularly if you depend on an income from your savings.
One way would be to speak to our expert team at Continuum. Our leading cash management tools can help find the best solutions for your cash surplus. There are plenty of opportunities in the market to put your cash surplus to work, so let us help.
Another may be to consider becoming an investor, rather than a saver. With the help of our expert Wealth Management team, we can help create an investment strategy that is suitable not only to your financial circumstances, but to your financial goals and aspirations.
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 Financial Conduct Authority does not regulate taxation advice or deposit accounts.
The value of investments can fall as well as rise and you may get back less than you invested.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Equity investments do not afford the same capital security as deposit accounts.
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