Quarterly Investment Insight

25 February, 2021 | News

Can a Negative be Positive?

Silvana Tenreyro, a policy maker at the Bank of England, has recently come out in favour of negative interest rates as a method to boost the UK economy out of COVID-19.

The Bank of England Base Rate is the amount of interest the Bank of England pays financial institutions who invest in it. High street banks will then use this to determine how much interest they charge on lending or pay on savings.

Here we look at the reasons behind it and the potential impact on consumers.

 

Why?

It was cut to a new low of 0.1% in March 2020 to stimulate the economy, some believe a further reduction or negative rates may be suitable. The base rate is the main tool in the Bank of England’s arsenal to maintain their inflation target of 2% per year. Switzerland, Denmark and the Euro Zone have all cut interest rates below zero to further encourage spending and borrowing.

 

Savings Rates

The lower the interest rates, the lower the savings rate. One concern is that if interest rates are negative consumers may see negative savings rates, effectively having to pay a bank for their savings. This however is unlikely.  With other economies who have negative interest rates, negative savings rates have only been passed on to institutional investors or significant deposits. Banks and buildings societies in the UK still need customers, applying negative interest rates would be a quick way to lose them so we would not expect this to be done. Having customers where their money returns more as cash under the mattress is not a good for the banking industry.

 

Borrowers

If the Bank of England are charging less for institutions to borrow from them this saving typically means lenders can afford to reduce interest rates to borrowing consumers whilst maintaining a margin. This means the expectation would be low borrowing rates for a while. Lenders do however have to consider the cost of administering the lending which does not change with lower interest rates. Lenders also currently have an eye on house prices. With house prices seeing a significant rise during the pandemic there is some concern that some of this rise may have been due to the Stamp Duty incentive and people bringing moves forward whilst other spending may have reduced. Lenders have therefore reduced their exposure to higher Loan to Value interest rates.

 

Investment Considerations

The consideration of low yielding holdings such as government bonds will only be compounded by even lower interest rates. As such we continue to reduce exposure to these assets whilst ensuring the overall level of investment risk is maintained. This was touched upon in my last quarterly newsletter.

Other news

A weak pound

6 October, 2022
Read article

Mortgages and the Self Employed

27 July, 2022
Read article

Investing During High Inflation

7 July, 2022
Read article

COP 26 and The Investment Industry

21 November, 2021
Read article