OVER the last year, I have covered the potential of negative interest rates on a few occasions.
Whilst a few people I know laughed at the beginning of the columns about the potential of negative rates, the reality is coming home to roost after the Bank of England’s comments last week.
The deputy governor has approached banks to ascertain the readiness of banks for the potential of rates moving below zero, or other forms of rates, potentially tiered. They have asked for feedback for the November 12 meeting, so put that date in your diary.
Specifically they are asking what banks would need in order to implement such a policy.
This letter to banks is the most open sign yet they may look to adopt a plan for the first time in 326 years.
If they need an excuse, Covid-19 may well be that opportunity they need.
Aside, you should also understand that negative interest rates and a cashless society are interlinked and what that might mean to you.
The messages from the Bank of England have been very confusing indeed. With such a move, economies, currencies and businesses would easily be spooked with its meaning. Add this to the bubbling cauldron of Brexit and Covid and you might be surprised if any business is not paralysed in its thinking or actions.
Instead of clear messaging, bumbling comments arrive from the bank discussing possibilities of negative rates, the type you normally hear in a pub from the indiscreet employee who was washing the windows and overheard an important meeting.
Quite astonishing, but then, 2016 to now have been nothing but that. My hair has started to go dark again.
Remember the Bank of England governor stated he was not planning or contemplating negative rates, only for seven days later to state that policy was under active review.
For such a policy to be effective, the financial sector needs to be ready and act in unison. Lenders not implementing the policy limits the benefit.
Financial markets are looking to spring for the adoption of negative interest rates, but expect further quantitative easing before then.
Are negative rates effective? There is as much evidence to prove one way or the other. Negative rates confuse society and business, so they take some marketing.
In Japan, lowering rates did not make people move their cash into infrastructure and the wider economy, instead they believed they were being misled and the central bank knew something they didn’t.
Mistrust in staff, mistrust in business partners, or mistrust at all, creates fear, and fear creates paralysis.
External and internal members of the UK’s Monetary Policy Committee have openly disagreed on policy in the last few weeks.
One thing for sure, interest rates are not rising. Those looking to fix their mortgage as I explained last year, should really consider what this means to their lending.
I would not fix, as I said last year. If you remember at the beginning of August, I mentioned the Danish bank offering a fixed rate of 0 per cent for 20 years. Consider.
Whilst not necessarily the best rate, you can fix for ten years at 2.08 per cent today. That’s £52,000 over 20 years and is not to be sniffed at if rates plummet to zero.
I would await the next six months to see how policy plays out.
In the EU, negative rates already apply. The AIB has stated it will take personal savings accounts to zero and large firms are already being charged negative rates and will soon be charged for large deposits.
The bank is charged by the European Central Bank for depositing money with it, which is an attempt to urge banks to lend more, a policy with limited success. See ‘fear’ above.
Other impacts are on sterling which would fall further, creating more false inflation due to the UK being a net importer (throw in Brexit and spiralling debt too). Defined benefit pension schemes would have further threats to their returns and indeed their existence.
Cheap mortgages create bubbles, and cheap loans create excessive debt, but do not expect savers to dump cash and spend. All evidence shows that people are confused (see ‘fear’ above) and hoard more cash.
Peter McGahan is chief executive officer of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a question on negative rates or any financial matter, call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit www.wwfp.net.
