The prospect of negative interest rates came to the fore in September, when the BoE effectively placed UK banks on notice, by asking them how ready they were if interest rates were to be cut to zero or turned negative. Attention immediately turned to the BoE’s Monetary Policy Committee in early November; however, the bank resisted the urge to set negative interest rates – opting to keep its base rate steady at 0.1% and impose a strategy of quantitative easing, injecting £150 billion into the economy.
There was another twist in the tale later in November, after a series of vaccine breakthroughs led investors to focus on the upside rather than downside risks.1 The FT says the interest rate is now expected to ‘trough at roughly zero per cent in late 2022’2, a big shift from earlier predictions –according to the Reuters, investors had previously been betting on a rate cut below zero in May 2021.3
What would negative interest rates mean?
Although negative interest rates might be some way off, they’re still a possibility, so it’s important to recognise what they could mean for your investments, including your cash savings, mortgage and pensions.
As mentioned previously, the primary motivation behind negative interest rates is to discourage saving and encourage lending and spending, in order to boost the economy. But because savers have already seen their interest rates dwindle in recent years, we think banks would be reluctant to pass a further cut on to customers who hold saving accounts.
While savers could, in theory, be charged to keep their money in a bank, this hasn’t happened in other countries with negative interest rates in play. Furthermore, commercial banks are not obliged to fully and precisely follow changes in official interest rates, so even a negative central bank rate would not automatically imply that savers would get negative interest rates.
That said, as saving rates fall further towards zero, it could be a good opportunity to look at your approach to cash savings.
Those on fixed-rate mortgages will see no difference, while variable-rate interest payments could indeed fall, but are unlikely to move below zero, as mortgage terms often state that borrowers will never pay less than zero. A negative base rate might drive mortgage demand, but negative rate mortgages are unlikely to be on the menu any time soon.
Pensions and investments
A negative rate would have an impact on gilt yields, and therefore pensions – specifically annuities, which are largely priced based on gilt yields. When it comes to investments, sterling could fall in line with interest rates, which would have implications for UK-based investments.
The value of advice
Of course, all of this is hypothetical at the moment, and as it stands, we believe there’s no cause for panic – but it might still be sensible to speak to your Wellesley adviser to review your options going forward.
Your adviser will look at your portfolio to ensure it is well-balanced to protect you from unexpected events. They will also review whether holding cash savings is currently the right option for you. We believe that if the Bank of England does set its base rate below zero, typical savers and borrowers should not be immediately affected – but, it could still be an opportune moment to consider shifting some investment to other sectors, while still having the buffer of an emergency cash fund. Your adviser will also make sure your portfolio is diversified across an array of countries, to protect you against a dip in sterling.
Most importantly, your adviser will provide you with guidance, stability and reassurance. We understand the psychological impact of a negative headline – and the fear of the unknown if the BoE does set its base rate below zero for the first time in its 326-year history – but it’s important not to make a “knee-jerk” reaction if negative interest rates are announced in the UK. Your adviser will help you keep your financial plans on track while talking you through any adjustments that would be beneficial in the short term.
If you’re concerned about the prospect of negative interest rates and what this might mean for your savings or investments, contact us today.
The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations.
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.