Lack of Interest

A Lack of Interest

By John Lister

With the Bank of England’s base rate at a historic interest thanks to the low base rate, so there’s low of 0.1%, you might think it couldn’t possibly go unlikely to be much change there. A reduction to any lower. The economic challenge of COVID-19 zero interest on such accounts is possible, at which could change that, with speculation that the rate point they’d mainly be a way of balancing risk. could actually drop below zero. It brings to mind a Credit cards and personal loans shouldn’t see much topsy-turvy world of banks paying people to borrow difference as there’s already a lot of variation among money and savings shrinking away, but what would different lenders and customers, so the base rate has actually happen? less influence. The ‘standard’ rate on a card may drop Between the 2007-8 financial crash and the economic a little, but that shouldn’t make much difference to uncertainty of Brexit, the Bank of England’s Monetary people who make savvy use of introductory offers Policy Committee has had plenty of reason to use and balance transfers. low rates to ease economic concerns. The idea is to Perhaps the biggest question mark is the effect on deter saving and promote consumer spending by current accounts, which could be a game of chicken. making borrowing cheaper. Most high street banks theoretically have the power The Bank of England confirmed in May that it is to apply negative rates. However, it’s questionable if considering using the rate cut tool again and having any would really want the bad publicity of being the negative rates for the first time ever in this country. first bank to start ‘taking people’s money’. The more It’s a highly unusual tactic but has been used in the likely options are that the major banks all do so at Nordic region and Japan in the past decade. the same time, or that they instead introduce fixed The effects are still an unknown quantity, however. monthly fees to use a bank account. With mortgages, many tracker rates have a minimum Overall then, if the base rate did go below zero, floor so homeowners wouldn’t get negative rates. it’s unlikely banks would pass on the effects to In countries which have had a negative rate, a few customers in a way that undermined the basic lenders have dropped the variable interest rate principles of saving and borrowing and produced charged to borrowers below zero. ‘illogical’ effects. Instead it’s more likely banks would Usually in those cases, the customer would continue simply be a bit more willing to lend more money to to make the same monthly payment but more of it more people and to be a bit less enthusiastic about would go toward paying off the capital rather than trying to attract new savers. the interest, so eventually the mortgage would be John Lister (www.johnlisterwriting.com) is a freelance paid off earlier. writer based in Bristol, specialising in technology and Risk-free savings accounts are already paying miserly personal finance. 22 Please mention The Villager and Town Life when responding to adverts

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