The prospect of negative interest rates (paying to keep your money with a bank) has been a hot topic in the financial industry in 2016, so we thought we’d summarise the current state of play for our readers.
The hype really picked up in December 2015 when the US central bank raised their interest rates because historically, the UK has usually followed suit. However, this proved not to be the case.
The Current State of Play
The financial website ‘This is Money’ predicts we may not see a rise in interest rates until next year, and even then, it’ll only be a modest increase… “We expect the Bank of England to only lift interest rates to 1.25% by end-2017 and 2.25% by end-2018.”
It’s too early to say how well interest rate rises will work (if they materialise), but we’ll keep you updated on significant developments as they occur.
The European Central Bank (ECB) is an existing member of the Negative Interest Rate Policy (NIRP) club, which has recently been joined by the Bank of Japan. For those unfamiliar, central banks act as a bank for commercial banks.
The ECB could potentially declare an action to take rates lower in their upcoming meeting on 10 March 2016, meaning the eurozone countries could fall further below the negative threshold.
At present, it’s mainly commercial banks being charged negative interest rates for keeping money (excess revenue) with the central banks – creating a scenario where the lender pays the borrower. The aim of this is to nurture more lending across our economy, as commercials banks are effectively being punished for keeping money.
This strategy should encourage commercial banks to lend money instead of ‘stashing’ it away. As a result, we could see the general public spending more instead of saving, thus stimulating the economy.
“Eurozone banks have begun to lend more to households and businesses. Such lending began shrinking in mid-2012 and stayed that way through 2014. It began turning around last year. At an annual growth rate of 0.6%, it is still far from robust, however, it remains to be seen whether stronger benefits come at more-negative rates. And it’s impossible to know whether things might have been much worse had the countries not tried negative rates.”
There’s been a lot in the news about negative interest rates, and you may be thinking your money would be better off under your mattress than in a bank, so we want to set your mind at rest. Private individuals are not directly affected at present, and in fairness, are unlikely to be. The NIRP scheme is purely an incentive to encourage commercial banks to stop stockpiling cash and lend more.
If you’re a homeowner looking to prepare financially for a potential rise in interest rates, click here for our recommendations.
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