What does a negative interest rate mean?

Negative interest is an interest rate that falls below zero per cent. A negative interest rate is a reversal of how a bank typically works. Currently, most high street banks pay interest at a rate of 0.01 per cent. When negative interest rates occur, borrowers gain interest as opposed to paying interest to lenders.

 

Is the Bank of England setting negative rates?

Bailey set out to put minds at ease on a British Chambers of Commerce webinar. In an attempt to play down speculation, he disclosed that policymakers were only discussing negative interest rates to make sure that the option was there if necessary, not because they will be put in place imminently. He explained: ‘It would be a cardinal sin in my view if we said we had a tool in the box which we didn’t think could be operationally used…Yes, it’s in the tool bag, but that doesn’t mean we’re going to use negative rates.’

As part of the research into its use, Bailey launched a study on whether the UK should set negative interest rates. The study reviews other countries who have implemented this, such as Japan and parts of the EU. The governor discussed other countries’ experiences of negative rates, describing them as a ‘mixed bag’. The effectiveness depended largely on the framework of each individual banking system as well as the time at which it was implemented.

On Tuesday, Bailey gave an online speech in which he hoped to clarify further that the bank had not decided whether rates will be set at below zero for the first time or settled any date for when this could happen. Whether the Bank of England is planning to push rates into the red remains unknown, but for now, it seems certain that Bailey wants to leave negative rates on the table.

How could this affect me?

If the Bank of England puts negative rates in place, commercial banks will be charged to hold cash deposits with them. As a result, banks will pass on these costs to the savers. With negative rates in place, your bank will most likely charge you to save with them, rather than paying you interest. It may also mean that borrowing, including mortgages, will become cheaper. Your credit card interest rates will probably depreciate as well. However, there is no guarantee that banks will pass on the benefit to the individual.

 

Why are negative interest rates being considered?

In theory, implementing negative rates would boost the economy. The aim is to encourage consumers and banks to use, borrow and lend money more freely and take more risks. If negative interest rates crush yields on savings accounts, people are far less likely to keep money tucked away in the bank and far more likely to spend or invest. As the second wave of COVID takes a thorough hit to the economy, the Bank of England is considering this option in hopes of reigniting the economy.