Think positive about negative interest rates
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.