A Lack of Interest

With the Bank of England’s base rate at a historic low of 0.1%, you might think it couldn’t possibly go any lower. The economic challenge of COVID-19 could change that, with speculation that the rate could actually drop below zero. It brings to mind a topsy-turvy world of banks paying people to borrow money and savings shrinking away, but what would actually happen? Between the 2007-8 financial crash and the economic uncertainty of Brexit, the Bank of England’s Monetary Policy Committee has had plenty of reason to use low rates to ease economic concerns. The idea is to deter saving and promote consumer spending by making borrowing cheaper. The Bank of England confirmed in May that it is considering using the rate cut tool again and having negative rates for the first time ever in this country. It’s a highly unusual tactic but has been used in the Nordic region and Japan in the past decade. The effects are still an unknown quantity, however. With mortgages, many tracker rates have a minimum floor so homeowners wouldn’t get negative rates. In countries which have had a negative rate, a few lenders have dropped the variable interest rate charged to borrowers below zero. Usually in those cases, the customer would continue to make the same monthly payment but more of it would go toward paying off the capital rather than the interest, so eventually the mortgage would be paid off earlier. Risk-free savings accounts are already paying miserly By John Lister

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interest thanks to the low base rate, so there’s unlikely to be much change there. A reduction to zero interest on such accounts is possible, at which point they’d mainly be a way of balancing risk. Credit cards and personal loans shouldn’t see much difference as there’s already a lot of variation among different lenders and customers, so the base rate has less influence. The ‘standard’ rate on a card may drop a little, but that shouldn’t make much difference to people who make savvy use of introductory offers and balance transfers. Perhaps the biggest question mark is the effect on current accounts, which could be a game of chicken. Most high street banks theoretically have the power to apply negative rates. However, it’s questionable if any would really want the bad publicity of being the first bank to start ‘taking people’s money’. The more likely options are that the major banks all do so at the same time, or that they instead introduce fixed monthly fees to use a bank account. Overall then, if the base rate did go below zero, it’s unlikely banks would pass on the effects to customers in a way that undermined the basic principles of saving and borrowing and produced ‘illogical’ effects. Instead it’s more likely banks would simply be a bit more willing to lend more money to more people and to be a bit less enthusiastic about trying to attract new savers. John Lister (www.johnlisterwriting.com) is a freelance writer based in Bristol, specialising in technology and personal finance.