What are negative interest rates?

Negative interest rates occur when interest rates fall below 0% and therefore borrowers are credited interest rather than paying interest to lenders. 

The purpose of negative interest rates is to encourage both bank lending and household spending to help boost the economy, by encouraging consumers and banks to take more risk through borrowing and lending money. 

An example of a negative interest rate would be, if your mortgage comes with a negative interest rate, you'll end up paying back less than you borrowed. 

What does this mean for UK banks?

Whilst some parts of the world already have negative interest rates in place, there is still a way to go before negative interest rates are implemented in the UK. Recently, however, there has been some speculation that the Bank of England is preparing to push its main interest rate into negative territory for the first time in its 326-year history. 

Policymakers have stressed that cutting borrowing costs to below zero could be one of the best ways to boost the economy. This may not need to happen immediately, meaning some banks may begin to trial negative interest rates as options soon.  

What is a Bank rate/ Base Rate?

A bank or base rate refers to when the Bank of England sets a rate that other banks must pay to borrow from them. By making the base rate negative, the BofE would effectively be charging commercial banks for holding money with it. This rate applies to the banks and not to each individual borrower, so savings will not be affected. 

Therefore, commercial banks lend their ‘spare’ money to consumers and businesses at much lower rates. Encouraging individuals to borrow from them with a smaller interest repayment means more people are likely to take up the offer of lower rates, with the money going back into the economy.

Does this affect me? 

There are a few banks already in the UK that charge for current accounts, but there is no immediate sign that this will be in place for all banks anytime soon. For now, we will not be forced to pay to keep small sums on deposit.
In the future, banks could pass on the cost of negative base rates, meaning we’d have no interest on our savings and instead have to pay small fees in order to save our money in bank accounts or building societies. 

If you would like to discuss investment strategies, negative interest rates or any other financial planning matter, please do not hesitate to contact us.

Read more on negative interest rates on BBC website.