Negative interest rates UK: could Bank of England rates drop below 0 - and what would it mean for mortgages and savings?

The Bank of England are considering the introduction of negative interest rates

Friday, 5th February 2021, 4:10 pm
Negative rates have been teased by the Bank of England (Getty Images)

On February 4 it was reported that The Bank of England had written to lenders and insurers across the country asking them to prepare in case it decides to reduce the base interest rate to below zero.

The Bank’s deputy governor of prudential regulation, Sam Woods, told banks they should get ready for a potential decision on negative rates.

But he stressed not to read the request as an indication that negative rates will or will not be implemented.

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What exactly are negative interest rates and why are money lenders being told to prepare for their implementation?

What are negative interest rates?

If the Bank of England were to introduce negative interest rates, banks would be charged to leave their cash with the central bank, rather than earning money as they would with a positive interest rate.

How does it work?

The mechanism aims to deter banks from hoarding funds, encouraging them to eachother, consumers and businesses more, ultimately stimulating the economy.

Could this result in me paying for a savings account?

Laith Khalaf, financial analyst at AJ Bell, said: “Experience of negative rates in other countries suggests that even if rates turn negative, most banks wouldn’t charge high street customers to hold money in their accounts, mainly because you can always take cash out of the bank and stuff it in a mattress.

“Those with higher balances would be most at risk, because a bank account provides security that is hard to replicate without financial cost.”

Mr Khalaf said that a negative base rate “would likely lead to an explosion in the number of bank accounts paying zero interest, which currently house around £225 billion of savers’ cash.

“While savers might not explicitly pay interest to their bank, it’s possible banks would introduce fees instead.”

He continued: “Whether we get negative rates or not, the outlook for cash savers is a continuation of rates at rock bottom levels. With inflation expected to rise this year, that’s really going to bite into the buying power of cash held in the bank.”

Sarah Coles, personal finance analyst, Hargreaves Lansdown, said: “Banks really don’t want to start charging us to save.

“They’d be worried we’d withdraw our savings and keep them under the mattress – leaving the bank short of liquidity.

“They would undoubtedly reduce rates where they could, and some might cut them to 0%. However, even if this happens – and that’s a big if – there will still be banks competing for market share, and offering positive rates to those who are prepared to shop around.”

What could this do to mortgages?

Home owners hoping to get paid to borrow money could be left disappointed.

Looking at mortgages, Ms Coles said: “Most mortgages are fixed anyway, and variable mortgages usually have a floor they can’t drop beneath.

“New mortgages would get cheaper but in reality, we’d be unlikely to be paid to borrow money.

“In those countries where they have negative rates, some have fed through into a handful of mortgages, but because of the fees they come with, people aren’t really being paid to borrow.”