I was surprised to see the Bank of England tell lenders to prepare for negative interest rates last week.
However, I think the reality is probably less concerning than headlines first appeared – as the Bank went on to reassure that this doesn’t necessarily mean they will turn negative.
To be honest I didn’t realise banks needed as long as six months to prepare for negative interest rates, but if that is the case it’s only sensible for the Monetary Policy Committee to issue this guidance.
I hope that such a policy is considered a last resort however.
Negative rates
Japan has had negative interest rates since 2014, which means banks are charged to hold money.
In theory people are subsequently encouraged to spend their money rather than pay to keep hold of it, keeping the economy moving.
However it can also stir up concerns about bank runs and profitability, while saving prudently isn’t rewarded.
Long-term low interest rates
The UK, along with much of the rest of the world, has now held interest rates at almost rock bottom levels since the global financial crisis, and you do wonder if and when they’ll ever return to ‘normal’ levels.
In 2007 the Bank of England interest rate was 5.5%, but it’s been below 0.75% since 2009 and it’s currently at 0.1% – the lowest it’s ever been.
Money is also artificially being created and pumped into the economy via Quantitative Easing (QE), which keeps the markets moving but can cause inflation.
Impact on the property market
Having a low interest rate has been very helpful for those looking for a mortgage, as it feeds into cheap mortgage rates, but it’s been awful for savers – who need to invest carefully to make their money work for them.
With this in mind, it goes some way to explaining why property has been so popular for investors since the global financial crisis – it’s been one way for people to make a strong yield and the cost of borrowing has been low for so long.
Closing thoughts
Low interest rates have already had an adverse impact on those who don’t already own assets like property – as surging demand fired up by cheap money has resulted in prices rising, while there’s little incentive to stick to the simplicity of a bank savings account.
Therefore negative interest rates isn’t something I’d like to see.
In an ideal world however the Bank of England should have some wiggle room to stimulate the economy in times of crisis.
When rates are already at 0.1% you can see why the Monetary Policy Committee is now considering negative interest rates, because there’s almost nowhere else to go.
Therefore I hope the MPC feels comfortable enough to raise interest rates in the months ahead – otherwise they could turn negative at the first sign of an economic shock.
Ryan Bembridge, Editor, PropertyWire
