Negative interest rates: Three scary words?

The Momentum UK Team 07 March 2013

Negative interest rates: Three little words spoken by the Deputy governor of the Bank of England that could scare the wits out of savers across the country. Interest rates are at an all-time low, and the fact is that negative interest rates could make them lower still.

Negative interest rates? What are they?

Building societies and banks will currently receive a 0.5% interest rate from the Bank of England (BoE) if they deposit money there. A negative interest rate would mean, quite simply, that they would have to pay if they were to make a deposit with the BoE.

Why would banks bother if they have to pay?

Well, they might not and that's exactly what the Bank of England might be hoping for. The measures would be put in place to encourage lenders to lend to home-buyers and businesses instead of parking the cash out of reach. However, while the measure could improve the lot of borrowers, it could, once again, hit the interest rates available to savers, although it wouldn’t necessarily mean that they also have to pay to put their cash away.

There is a precedent for negative interest rates; The Swedish central bank (Riksbank) introduced its own negative interest rate of -0.25% in 2009. However the negative interest rate only applied to some of the money held with the central bank- with the interest rate applied to overnight deposits remaining positive.

A negative interest rate, or even the suggestion of one could prompt banks to cut savings rates further in an already difficult climate for savers.

We're still less than a quarter of the way through the year and savings providers have already announced 338 rate cuts to existing savings accounts, with 145 planned for the month of March – all this and the base rate has remained static at 0.5% for 4 years.

While measures to increase lending could encourage economic growth, a negative interest rate could well prolong savers suffering as a result.