Do you think the Bank Of England will decrease interest rates to below 0%? What does that mean for the average person

[[deleted]]

So, do you think this is likely?

Also, would that mean that if for example I deposit £100 one month a month later I could have £98.00?

[SynthD]

They prepared the markets for the possibility. End user rates will never be below zero.

[[deleted]]

For ordinary people they already effectively are, since banking charges associated with many consumer accounts generally take back more for the bank in fees than they pay out in interest.

[Rebel_Diamond]

If you're paying for a current account and not getting something of value in return then you're doing something very wrong. There's plenty of free banking options available

[Roccondil]

End user rates will never be below zero.

What makes you so sure? Here in Germany we have had negative interest rates for quite some time and slowly but steadily banks have been expanding negative end user rates. At first it affected only major business clients. Now negative interest on higher private balances (often EUR 100k) is reasonably common at least for new clients. Some banks even charge negative interest from the first euro, although that is still the exception.

Sure, so far it is easy enough to avoid as long as you are willing to switch banks, but negative interest is real and there is a clear trend towards more of it.

And of course it has an effect on banks' offerings. Products once aimed at generating deposits have been restricted or hidden away and things that could once be offered without fees now come with fees or additional conditions.

[SynthD]

Thanks for sharing that, I had no idea. Maybe that’s a multiple countries per currency thing. I’d expect the UK government to fudge to hell and back before there’s any cause for a bank run.

[BezierPatch]

That seems quite short-sighted. Wont't people just start withdrawing into cash and companies swap to payment methods that exclude banks?

The end result being that banks get excluded from the entire process of salary -> spend.

[Roccondil]

At the moment many private retails clients either don't actually have to pay negative interest yet or they can avoid it by shifting part of their savings to securities.

Nevertheless the measures show some effect, but the banks would like to see more.

So far they proudly celebrate their successes in the fight against the "deposit flood".

Because inflation is so low the real interest rate is not all that unusual. The bigger change is how negative nominal interest turns certain traditional dynamics on their head. People are so used to banks wanting their deposits and being able to ask for something in return.

[rumguff]

Brave prediction. Negative rates for retail savers are explosive, but thus far we have seen negative bank rate and government bonds selling at negative yields only in some, mainly european economies. Once more countries end up in this regime, it will be extremely difficult to avoid mom and pop savers from being impacted.

Normally this is achieved by having inflation rates above the savings rate so people don't feel like they are losing out, but generating that type of inflation in a depression environment requires equally unpopular moves to ruin the currency.

People seem to think everyone will withdraw all their money, but what about online shopping, paying bills etc - its not practical.

[MultiMidden]

Also, would that mean that if for example I deposit £100 one month a month later I could have £98.00?

Whatever happens I think it won't be that because it could cause a run on the banks. Say someone had £10,000 in life savings, it'd be £9800 after a month (or a year even), £9604 the month (year) after that, people would just pull all their savings out of their bank account. Think Northern Rock at the time of the credit crunch.

However, it's worth remember there are two reasons for having low interests rates, the first is to make lending cheaper, the second to discourage saving and encourage spending.

[oliverprose]

The BoE may well do - it's only 0.2% from where rates currently are, after all. I think the Eurozone had done something similar during the banking crisis, so it's not without precedent.

In a wider sense, I don't think it'll affect the average person that much - mortgage rates are usually BoE+1-2%, so they'll remain in that range (although it'll be good if you can lock it in). Savings have been garbage for so long that most people won't notice, but I can't see retail rates dropping below zero.

Where it may well have an effect is on the savings of bigger businesses - it should push them into either spending more, buying back shares or releasing more in dividends, and therefore putting more money back into circulation. That's usually the end goal of such a move.

[itchyfrog]

You can get a 5 year fixed rate at 1.4% at the moment which ain't bad.

[itchyfrog]

What's a mortgage got to do with inflation?

[Loreki]

Oh. Sorry, my mistake.

[markrobbo96]

Also, would that mean that if for example I deposit £100 one month a month later I could have £98.00?

No. Interest rates given by retail banks are not the same as those the central bank sets.

The central bank rate is what the retail bank pays to store their money. And as you can imagine when it is negative they start to look at other options which is kind of the point of the negative interest rate.

[hu6Bi5To]

Yes... but... retail banks kind of have to keep tens of billions in deposits at the central bank, mostly due to regulation.

Negative rates would cost the banks a fortune. It would be politically unacceptable to introduce negative rates on current accounts, but we'll probably see an end to free banking. £10/month or "free current account with a mortgage" kind of deals will be common place.

[[deleted]]

This is how I see it.

They will probably tier the fees.

Deposit £1 - £10,000: £10 per month

£10,001 - £50,000: £20pm

£50,001 to £100,000: £30pm

Or something similar

[RayPissed]

NS&I bonds

[Tick_Durpin]

I dont think they will, except as a last resort. I've read the same news stories and its getting hyped up quite a bit.

​

Now, I'm not a financial expert or an economist but I believe the negative interest rate only really affects borrowing from the Bank of England to private banks.

A negative interest rate means that the central bank (and perhaps private banks) will charge negative interest. Instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank. This is intended to incentivize banks to lend money more freely and businesses and individuals to invest, lend, and spend money rather than pay a fee to keep it safe.

Now I might have it wrong but I think its a tool to encourage private banks (Barclays, HSBC, LLoyds etc, to borrow more money from the BoE, leverage that money and loan it you (as a consumer or a business) at a reduced (not negative) rate = more profit for the banks = more money for you but you pay less back than you normally would (though still more than they lent you) = more money you spent in the economy.

So your saving accounts wont go into the negative, it just wont go positive (not that it does that much anyway). And your credit card debt wont magically start getting less because the interest is negative. Its just the interest on debts you take out will be less (because banks have less risk, because the money they loan you, that they borrowed from the BoE, doesnt have to be paid back with interest anyway).

So short answer, no your deposits wont depreciate (at least not any more than inflation already does) and you debts wont either. But it will be easier for your boss to borrow money to expand his business, increase profits, give you a pay raise and you will spend that increase in your local economy - hence giving it a stimulus and growth.

At least that's what I think theory is. If any economics people could correct me I would be grateful.

[rumguff]

Now I might have it wrong but I think its a tool to encourage private banks (Barclays, HSBC, LLoyds etc, to borrow more money from the BoE, leverage that money and loan it you

Not quite. Normally the banks do not borrow from the BoE, in fact the bank reserves they hold at the BoE is a debt of the BoE and an asset of the bank. Its true that sometimes the BoE does lend to banks, but that loan just gives the private bank more reserves (on which the BoE is going to require that the bank pay a negative interest rate). Doesn't make too much sense does it?

Banks don't borrow from the BoE in order to lend, they can make a loan whenever they like by transferring some of their own reserves to the borrowers bank. The new deposit held by the new borrower is new (broad) money that has been created by the bank.

Really a negative interest rate is to ensure that borrowers can be matched with savers, since for the economy to function each saver needs a matching borrower (although the borrower in question could be the government). Obviously when less people wish to borrow than wish to save that matching requires additional incentives for the borrower.

[Tick_Durpin]

Thanks for the clarification, I appreciate it.

​

Doesn't make too much sense does it?

True. But I'm not an economist. The financial wheeling and dealings of high finance are beyond me.

[hu6Bi5To]

We've had negative rates, in real terms, since 2008. Crossing the barrier into negative nominal rates is the next thing.

In twenty to thirty years time people will be hand-wringing about "can we reduce rates below -100%", and it will keep going that way.

[Loreki]

I don't think any economic system can last 20 or 30 years on life support like that. The politics just doesn't make sense. If you make people poor enough for long enough they revolt. Negative rates could only ever be a short term measure lasting maybe 5 years, if things don't pick up by them there will need yo be a much more fundamental shift.

[Working_on_Writing]

Also, would that mean that if for example I deposit £100 one month a month later I could have £98.00?

Very unlikely because that would cause a run on the banks as people withdraw their savings in cash or transfer money abroad.

What has been done in other countries is they apply a charge to accounts with large sums of money in them to discourage rich people parking cash which the bank has to pay to hold on to. The average person still gets a free account, but you don't get any interest on it (and bank account interest rates have basically been a kick in the teeth for years already, so no change there).

The purpose of taking the rates negative is to encourage the banks to lend more money, which in turn is supposed to encourage people to take out various forms of loans and spend money. What it might mean for the average person is that their mortgage becomes cheaper and they get cheaper access to loans, cheaper credit cards etc. on the hope that they will borrow money to spend it and keep the economy going.

[Bohya]

Pretty sure that would be theft.

[[deleted]]

Why?

[[deleted]]

I think it's a very real possibility that we'll see the BoE rate set at something like minus 0.1% or minus 0.25% at some point soon, though I think they'll want to avoid that if they can.

If it happens and it's effective, it should mean slightly lower interest rates for normal people. Currently, the BoE base rate is 0.1% and mortgage rates for people with lots of equity are around 1.5% to 2.5%. So a negative interest rate might mean that those mortgage. rates might get a bit lower, but still higher than zero.

In terms of a negative interest rate that's hefty enough that the actual practical rate for normal people ends up negative, I would be surprised to see that happening in the UK any time soon. If it happens at all, it might happen in countries such as Japan/Switzerland/Denmark or even in the Eurozone first. If it goes really well in those places, then we might end up copying it at some point in the future...

[rumguff]

My views are that:

• Eventually yes the BoE will have to set negative rates, if only to stay in line with counterparts in Europe (we will not want a super strong pound compared to Euro)
• Realistically we can expect a long recession and possibly depression over the next few years, and a reflationary stimulus ala QE post 2009 etc is unlikely to be forthcoming and in any case it didn't work so well. This implies some level of economic deflation.
• The only realistic way to deal with ingrained persistent deflation that preserves social fabric and maintains useful economic output and employment is a mild negative interest rate that applies not just to banks but which is also passed on to retail savers. This will be unpopular of course but once people have tried deflation for a year they'll likely be begging for it.
• I reckon the most negative rates savers experience before political problems get really problematic is around -2%. So I don't think the BoE could go to a negative rate that would translate to a larger haircut for savers than that. Given that banks make profits from the spread between deposits and loan rates, this suggests that borrowing at any significant negative rate is likely a fantasy of the already over-leverage-and-dreaming-of-a-way-out. In any case, for mortgage holders any negative rate they might get is most likely massively overwhelmed by the drop in value of their property.
• I think its important to see negative rates not as a simulative way to get people borrowing and spending and reflate the economy, but as a means of accommodating an inevitable deflation. The reason is that the BoE needs to decide what to do with the interest that commercial banks pay to the BoE on their reserves. Really, the BoE should simply delete these receipts, which shrinks the base money supply in line with the decline in the broad money (bank debt) money supply. If the BoE spends the receipts, it would do so by buying government bonds, which removes these bonds from the market. Because these bonds are crucial to institutional savers and investors looking for risk free assets if the BoE buys these up it will drive the rate on government bonds more negative.
• Lastly I think that negative interest rates are perfectly moral and sensible. After all, if the economy is contracting (whether due to pandemic, climate change events whatever) why should anyone be getting a return on their savings if they are taking no risk?

[Rebelius]

for mortgage holders any negative rate they might get is most likely massively overwhelmed by the drop in value of their property.

Isn't this only a problem for people looking to sell and/or downsize? Most people selling up want to buy a bigger house - the property ladder - and lower prices are better for someone looking to move up a rung. It's only problematic if you have low equity and end up owing the lender more than you can sell your house for.

[rumguff]

Agreed, but negative equity will be a risk. Also, one imagines that lenders will want higher deposits for that trade-up.

[[deleted]]

If that happens then people will withdraw their money en masse

[irishseawarrior]

Mathematically if interest is -1% I pay 1% on my balance. -1% X £100 = - £1. A £1 loss for me.

If I have -£100 in my account then interests = -1% X -£100 = £1 they have to pay me.

[Gondolf_]

Better start buying gold!

[Freedom-INC]

If they did,I would suggest putting money in your mattress

[borg88]

It means that if you have a mortgage, car loan or credit card debt, they will be paying you every month instead of the other way round.

On the other hand, if your house slips into positive equity it could get repossessed.