After slashing interest rates to a record low of 0.1% in March, the continued economic damage of the coronavirus has now made the previously unthinkable a possibility for the UK, after a senior Bank of England official speculated on the possibility of negative interest rates.
BoE Deputy Governor Ben Broadbent told CNBC television that, faced with the problems created by the UK lockdown, no economic measures can be ruled out, and that “We keep under review all our potential policy tools.” Asked about negative rates he continued, “this is a question that’s been thought about on and off since the financial crisis and it’s a balanced judgement.”
Negative interest base rates would seem then to be one of the options being considered by the BoE. A negative base rate would mean that financial institutions would pay the BoE to deposit reserves with it; essentially charging financial institutions to hold their cash.
In practice, most institutions should then maintain the absolute minimum positive or 0% interest rates to their customers. In theory this makes borrowing more appealing and stimulates spending to bolster the UK economy through the pandemic.
The downside of negative rates is the huge effect it has on investments. Pitching a negative rate to effectively stimulate economic growth and still be bearable to investors is extremely difficult.
Should the Bank of England go too far with negative rates the impact for investors and savers could be devastating. Despite the fine judgement this requires, it appears to be an option very much on the table.
Base rates have been negative in Switzerland, Denmark, Japan and the eurozone for a number of years. Switzerland and Denmark have the largest negative rates of -0.75%.
For some, negative interest rates can be good, and in some cases have seen banks offering mortgages at negative rates - meaning monthly payments are still made, but customers end up paying back less than they originally borrowed. For savers however it can result in paying banks for the privilege of them holding their cash. Those with large saving accounts especially can see relatively large amounts of their wealth taken by banks while it sits in their accounts.
Negative interest rates have also been considered unthinkable in the US, until the current crisis that is. With the U.S. federal deficit nearly quadrupling to a record $3.7 trillion the Federal Reserve may be forced to reconsider its own position on negative rates.
US base rates have far reaching effects beyond the United States though. Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank in Tokyo commented on this. He said to Reuters, “In the United States, companies rely on credit markets for their financing.” and went on to say that, “adopting negative rates in the United States would disrupt the pricing of so many securities.”
As with all matters during the coronavirus crisis, governments and central banks are treading a very fine line, but efforts to keep the global economy afloat have already impacted many investors. If savers start to see their wealth being reduced by banks, then safe haven demand will only increase further.
