Feeling a bit negative?15 February 2021
Negative interest rates
You might have seen the topic of negative interest rates mentioned in the press in early February 2021. The Bank of England published its quarterly monetary policy report on 04 February – it's always an interesting read and the February 2021 edition can be found here: https://www.bankofengland.co.uk/monetary-policy-report/2021/february-2021
The monetary policy report sets out the economic analysis and inflation projections that the Monetary Policy Committee of the Bank of England uses to make interest rate decisions. One of the most significant points was a warning to banks and building societies to be prepared for the possibility that interest rates may need to drop below zero.
It should be noted that this is a possibility only – an 'insurance policy' in case the economy does not bounce back from the COVID-19 pandemic as expected over the coming months. However, it is an interesting concept and one which can sometimes be misunderstood.
In a negative interest rate environment, instead of earning interest on money deposited with a central bank (such as the Bank of England), banks and other financial firms have to pay to store their cash with the central bank. The hope is that this will encourage banks to boost lending to consumers and businesses and therefore help the wider economy. The European Central Bank, the Swiss and Danish central banks and the Bank of Japan already charge banks to deposit money – in fact, rates in Denmark have been below zero for longer than anywhere else in the world.
This might all seem a long way removed from normal life – so would there be an effect on our day-to-day finances if we experienced negative interest rates in the UK?
Would there be an effect on mortgages?
This depends on whether you have a variable rate loan, and on whether lenders pass on the rate reduction.
If it is a variable-rate mortgage – a tracker, or a mortgage on, or linked to, a lender's standard variable rate – the rate could fall somewhat if the base rate is cut. However, the drop is likely to be limited by terms and conditions. Some large lenders, for example, will never reduce the rate that a mortgage tracks below 0% on mortgages arranged since 2009. Therefore, if your mortgage is at base rate plus one percentage point, it may never fall below 1% pa.
If it's a fixed-rate mortgage, nothing will happen if interest rates are cut. Many households are on this type of arrangement; in recent years, about nine in 10 new mortgages have been taken on a fixed rate.
We do not provide advice on mortgages, however, can refer you to an independent mortgage broker if required.
What would it mean for savers?
Perhaps more misery? Rates on savings accounts have fallen significantly since the COVID-19 pandemic began and even the government-backed National Savings & Investments (NS&I) has slashed returns. A negative base rate is likely to lead to more accounts paying 0% or only slightly above that, meaning the value of deposits is further eroded by inflation.
It could also mean that banks start to consider fees for current accounts. As an example, HSBC has already said that low interest rates could lead to it introducing fees on its accounts.
With this in mind, it could be a good time to consider where your money is, and if you need to do something about it.
Switching bank accounts
The process is now quicker and far easier than it used to be and takes seven working days.
There is a free service to help you switch – the Current Account Switch Service – and more details can be found here: https://www.currentaccountswitch.co.uk/Pages/Home.aspx
The switching service can even close your old account and move your money, direct debits, standing orders etc across to the new account, along with payments that currently go into your old account, such as your salary.
We have lived through a low interest environment for some time now, and this shows no sign of changing over the short to medium term. It is increasingly difficult to achieve any meaningful return from cash or cash type investments. This does not mean that they are not worth holding – it is always sensible to maintain a healthy cash fund in case of immediate need. However, depending on your attitude to investment risk and capacity for loss, it may be worth considering stocks & shares investments for a proportion of cash on deposit, with the aim of achieving higher returns into the future, although this is not guaranteed.
If you would like to discuss investment, or simply to review your financial position, then please contact the team at Chapters Financial who will be pleased to help.
No individual advice is provided during the course of this blog / webpage.
Keith Churchouse FPFS
Chartered Financial Planner
Chapters Financial Limited