Negative interest rates have so far never been introduced in the UK’s history, despite their use in other countries such as Japan and Switzerland. However, when the Bank of England took the decision to reduce its base rate to an historic low of 0.1 percent, the move was a shocking one. It led to further speculation regarding interest rates, and whether these could even be lowered further than the current rate at which they are set.
This is a topic which has once again arisen this week, following the comments of Monetary Policy Committee member, Silvana Tenreyo.
Ms Tenreyo made remarks on negative interest rates in an online speech to the University of the West of England, where she outlined the potential benefits of such a move.
The MPC member said a cut to interest rates below zero could be positive for growth, and could be achieved without an adverse effect on banks.
She said: “My overall assessment is that, while we can never have complete certainty, negative interest rates should with high likelihood boost UK growth and inflation.
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To provide further insight on the matter, Steven Cameron Pensions Director at Aegon, examined the policy.
He said: “The pandemic has had widely differing financial implications for individuals.
“Some have lost their jobs or seen their businesses suffer, leading to immediate financial difficulties. Others have found restrictions on what they can do has led them to saving more money every month.
“Despite the super-low interest rates available from High Street accounts, much of that money is currently sitting in cash.
“There’s speculation that in the coming months, the Bank of England could reduce the base rate further, making it negative.
“The intention here may be to encourage spending to get the economy ticking over at a faster rate, but the prospect of individuals being charged to keep money in the bank would be a real game changer and it’s not clear how savers might react.”
What is clear, however, is that negative interest rates would be a significant move for the UK to take.
Other countries have tried the measure with varying success, and discovering how negative rates would impact Britain and its savers will be intriguing to note.
Mr Cameron continued: “The prospect of being charged to hold savings in cash is likely to increase the numbers who are already reviewing their savings solutions with a view to finding an alternative home.
“Research conducted at the end of last year showed that worryingly, some individuals might react to a charge on money held on deposit by withdrawing it and ‘keeping it under the mattress’.
“This would not be a good outcome and if interest rates do go negative, there will be a huge need for support and advice to make sure individuals do what’s in their best interest.”
Some may choose to invest current cash savings in alternative ways, such as choosing a stocks and shares ISA or pension.
While these options could create a greater return, it is also important to note such an outcome is not guaranteed.
As a result, people should consider this with care before taking action.
Others, however, Mr Cameron concluded, may wish to take a different approach, paying off debts or putting their money towards their mortgage.
This could help people to save money in the short term, while also aiding their financial resilience in the longer term.