What A Negative Interest Base Rate Could Mean

With the Coronavirus pandemic deeply affecting the economy, the Bank of England is deep in thought about applying a negative interest base rate. What would this mean for both consumers and businesses?

The interest base rate is currently 0.1%, but with an uncertain outlook for the UK economy in the face of COVID-19, and with a WTO Brexit looming at the end of the year, the Bank of England has been getting feedback from UK banks as to whether they are ready for negative interest base rates should they be implemented.

"So, how could that affect you?"

For mortgages on a fixed-rate, a cut in interest rates taking it into the negative would have no change. 9 out of 10 mortgages taken out in recent years has been on a fixed rate. However, variable-rate mortgages would fall a little if the base rate is cut.

This drop is going to be limited in effect because most mortgages run slightly above the base rate. Older mortgages have a minimum rate specified in the paperwork so it's going to be worth reviewing your agreement to see how low it will go. Negative interest rate mortgages are on sale in countries such as Denmark, but there is no sign that any UK bank or building society will be offering the same here.

The most important aspect of a negative interest base rate is that financial institutions need to pay to keep money on deposit with the Bank of England rather than receive interest on it. This will mean that they are encouraged to reduce their own deposits, which could make them more eager to lend to both consumers and businesses.

It could be that to cover the cost of their own deposits, banks and building societies will start to charge instead of offering free current accounts. This may be in the form of a monthly fee, but could be a transactional cost with a small percentage of each deposit or withdrawal being charged. This is the case for a number of business banks, especially in the fintech arena, with neobanks such as Starling.

However, it's wealthy savers that may be the first to face fresh charges in the face of a negative interest base rate, with some banks charging for very large deposit of cash savings!

Loans shouldn't be affected as loan rates are already low and usually fixed for the term though credit card rates, which are usually low for new customers, may go up once introductory offers have expired.

When it comes to the Stock Market, a negative interest base rate could be a positive move as the value of future earnings would increase through the payouts to shareholders. A company's earnings increase in value in a low/negative interest rate environment, so it could bring a lot more investment into the country.

"Remember, the Bank of England is only consulting on a negative interest base rate!"

There's still a lot more it could do to support the economy such as buying more Government bonds which can also lower borrowing costs and encourage the banks to lend to both consumers and businesses without shifting the interest base rate into negative territory.

If you feel inspired to find out more about anything I've said here, do call me on 01908 774320 or leave a comment below and I'll be in touch as soon as I can.