What are Negative Interest Rates?

What are Negative Interest Rates?

The Bank of England (BoE) has been gearing up banks for the potential of negative interest rates for sometime now. BoE policy maker Silvana Tenreyro said a while back that the evidence from other countries with negative rates was “encouraging”. Rates currently stand at 0.1% and the BoE whilst playing down suggestions of negative rates have definitely left the door open for the possibility. They have looked into the prospect of negative rates to ensure they could introduce them if necessary.

What do negative interest rates mean for you?

Interest rates are used by high street banks to determine how much they need to pay savers for their deposits as well as how much interest they charge on mortgages and loans. The BoE reduces interest rates when it wants to stimulate the economy: the lower the rate, the more incentive there is to spend and less there is to save. The same will therefore be expected to happen if rates go negative. 

Does this mean I will be charged to keep money in the bank?

Yes. If rates go negative, banks will have to pay in order to hold cash deposits. The likely scenario being that they will pass these costs onto the consumer, as we have seen in Switzerland, Denmark and Japan. This means that the decade of low interest rates we have seen is likely to continue, if not get worse.

I have a variable rate mortgage, will the bank pay me interest on my loan?

This is highly unlikely, regrettably. Mortgage borrowers do not see any benefit in practice as the negative rates only tend to get passed onto savers. The best mortgage borrowers could hope for is a further reduction in their interest rate.  

How will this affect stocks?

Lower rates can have a positive impact on the price of stocks. With the scope narrowing for savers as to where best to put their money, stocks could see a boon from this. Bond rates do the opposite and slide, with the possibility of some government bonds turning negative too, as we are already seeing. You do have to bear in mind that this isn’t how things work in practice. Negative rates are generally the product of weak growth and or a recession, which are all products of a very weak economy. So any initial boost seen in the stock markets could be tempered with the stark reality that the economy is not looking very good. Although, I am of the view that the BoE are far more reactive than proactive, and I don’t think anyone would be shocked to learn we were in a recession if rates went negative.

This Post Has One Comment

  1. Concise and to the point description. Isn’t it a shame we can’t have negative rates on mortgages!!!

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