Think positive about negative interest rates

28 February 2013

The base rate of interest, set by the Bank of England has been at its record-breaking low for a record-breaking length of time. Things don’t seem to be getting better, so you may well believe that interest rates could hardly get any lower. But what do you know?

However, there has been some talk recently of negative interest rates and how the Bank of England are considering using them to resuscitate further stimulate the economy. You may be concerned about how said negative interest rates will affect you, but never fear, BW is here to set your mind at rest. Ish.

What are negative interest rates?

Negative interest rates are (unsurprisingly) interest rates in the negative numbers. In the same way that a (positive)annual interest rate of 2.5% would give you £2.50 interest on a balance of £100, a negative annual interest rate of -2.5% would deduct £2.50, and leave you with only £97.50 of your £100.

Of course, were such rates to apply to retail banking (that’s to customers like you and me), no-one would put their money in the bank, knowing they were going to get less out than they got in. Unless, of course, they were paying for a bank account which may be worthwhile, but otherwise, has exactly the same effect of reducing your capital. However, negative rates will not apply to retail banking- it will just get even harder (were such a thing possible) for you to find decent savings rates on bank accounts.

Instead, the negative interest rates will be separate from base rate and will be charged against the banks themselves; instead of guarding all their lovely money for free, or paying out interest, the Bank of England will charge banks a negative rate of interest for the privilege of storing their cash. Of course, much as a retail change would have sent bank customers scurrying to pad out their mattresses, banks will not be obliged to suffer this additional charge, and could instead withdraw their cash but have the additional costs of insuring it, securing it etc etc. The cynical among you might also contemplate that any extra charge a bank finds itself suffering will somehow find its way back to becoming a levy on the consumer.

So what is the point of negative interest rates?

Good point. The theory put forward by some economists is that the banks will not like having to pay an extra charge, so would rather not stick their (your) cash into the Bank of England vaults. Instead they will do some sums and realise that it makes far more economic sense (= profit) to lend out this money to desperate sorts looking for a mortgage, or other types of lending. That way, they not only save the negative interest rate charge, they also make a turn on the interest charged for lending. Once banks start lending, everyone will be so delighted at regaining a good line of credit that they will rush out and spend loads of money, thereby stimulating the economy. Easy peasy.


Yes that really is the (simplified) version of the negative interest rates theory. Of course, other economists think this is a load of poppycock and that it will never work. Just like George’s Brilliant and Well Laid plans for economic revival, we’ll have to wait and see what happens.

And we may be waiting a while- although Bank of England officials seem well briefed on the idea, that was ‘leaked’ earlier this week, the current line is that negative interest rates are not officially under consideration and will remain that way, until they are under consideration.

Still, at least we all know what’s (not) going on now then.

TOPICS:   Economy   Banking


  • Natty
    Excellent except not enough people want to borrow money for obvious reasons including the stupidly high interest rates the banks want to charge for borrowing the money in the first place. Is this the type of idea the new man at the BoE is being paid so much for?
  • chewbacca
    They have already tried/are doing this in other countries, although the jury is still out on whether it will work. An interesting point about it not affecting retail banking-it will, although not directly. An added bonus for the government would indeed be lower savings interest as it would keep inflation down and also encourage people to spend instead of save. Of course, mortgage rates would see no such decrease.
  • Zleet
    I wish I had been born a few decades ago so I would have already retired. It's getting to the point where by the time I hit my 70's I'll be massively in debt working until I drop with no access to free healthcare and either freezing or starving to death if I was unfortunate enough to become disabled. Rule fucking Britannia.
  • dougie
    So banks will be encouraged to come up with more hair-brained schemes to sucker people into more loans? Like "interest-only" mortgages isn't the latest ticking time bomb that people will be compensated for, just like endowment/ppi shite? Mind you, everyone with an interest-only mortgage has a strong case for compensation. I mean can you think of a more mortgage type name that could be any more misleading?? But seriously, they should be stopping banks from giving out ridiculous loans and get them to fall back to roughly 3 to 4 times a persons annual income like the good old days before we got ourselves into a royal shitter.
  • Zleet
    We really need a new system. Those billionaires who banded together to spend $600 billion tackling poverty should spend that on inventing fusion power, genetic technology and nano technology and free us from this state of perpetual global poverty. At this rate for a real change to happen the world is going to destroy itself in war and famine first and those few that survive will not want it to be as it was.
  • Dick
    They'll probably still only lend money to people and businesses that can pay it back. Like those living abroad.

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