The Bank of England says it’s weighing up a number of options to give the UK economy a boost to help it through the coronavirus crisis, including introducing a negative base rate.
If this were to happen, it would be a UK first. But what would the impact be for savers? If banks pay you interest when the base rate is positive, could a negative interest rate mean you have to pay your bank to hold your cash?
Here, Which? explains how a negative base rate could work and asks several savings experts for their views on what could happen to the savings market.
What could a negative base rate mean for saving accounts?
The Bank of England base rate determines how much banks are charged for borrowing money. The banks use this money to grant customer loans and then make a profit by charging interest on the repayments.
A high Bank of England base rate means banks are more likely to offer high savings rates, as using savers’ deposits to fund the bank’s loans is cheaper than borrowing from the central bank.
If the base rate is low, being able to borrow cheaply from the Bank of England can be far more attractive than having to pay interest to savers – which is why banks may then reduce their rates or pull particularly popular savings accounts.
It’s not clear whether a negative base rate would mean banks are paid to take out loans, but it does suggest that offering generous savings rates could become even less of a priority – something we’ve already seen in the wake of base rate reductions that have already happened this year.
What’s happening to savings rates now?
Savings rates have been in decline for some time, but the rate drops and account withdrawals have picked up speed since the Bank of England reduced the base rate to an historic low of 0.1% in March.
As the graph shows, interest rates are falling across the board. The average long-term account rate has fallen by 0.73% in 12 months; 0.32% since the lockdown began in March.
Those who got a one-year fix in July 2019 would have received an average rate of 1.41%; but now the average rate is just 0.86%. In fact, even today’s top-rate one-year fix offers less than the average rate last year.
As for instant-access rates – the accounts many flock to in times of economic uncertainty – today’s average of just 0.3% is less than half what it was last year. While a few market-leading accounts offer just over 1%, many only pay 0.01%.
Getting the highest rate for your savings is important to make sure your pot keeps up with inflation, which measures the rising prices of goods. If your interest rate doesn’t equal or exceed the rate of inflation (in April it stood at 0.8%), your savings will effectively lose value over time. As prices rise, this means you’ll be able to buy fewer things with the same amount of cash.
Why is the Bank of England considering a negative base rate?
The topic of negative interest rates has been discussed since the governor of the Bank of England, Andrew Bailey, said officials were ‘considering all options’ to help the British economy in the wake of the coronavirus crisis.
So, it’s not to say that it’s likely to happen, but it’s not being ruled out.
In theory, a negative base rate is a way to get people to pump money into the economy. As we’ve seen with lower base rates, an environment is created where savings are unattractive, but spending is easier – especially if banks pass cheap rates to their mortgages and loans.
Negative interest rate predictions: what do the experts think?
It’s hard to know what the financial industry will look like if the base rate turns negative, so we’ve asked several experts in the savings field for their thoughts on what could happen.
Sarah Coles, personal finance analyst at investment firm Hargreaves Lansdown
As to how likely it is that we’ll see a negative base rate, Sarah says: ‘It’s worth underlining that for the Bank of England, this is simply one of many considerations on the table. It would be a major change in policy, and not one we’re expecting imminently.
‘When other central banks have brought in negative rates, some banks have passed this on by introducing fees for savings accounts. But largely they have tried to avoid it, because they don’t want everyone to withdraw their cash.
Crucially, even if some banks were to charge for savings accounts, Sarah doesn’t think it will be the case everywhere.
‘Whatever happens to the Bank of England base rate, there are a wide range of savings rates on offer; the same would apply if the base rate went negative,’ she says. ‘It means that, whatever the Bank of England decides to do with central bank rates, it’s important to shop around for the best possible home for your savings.
‘At the moment, rates are falling across the board. So if you’re planning to tie up some of your savings for a fixed period of time in return for more interest, it’s worth doing so sooner rather than later.’
Kevin Mountford, co-founder of savings platform Raisin UK
While a negative base rate is being considered as one option to kick-start the economy, Kevin points out that earning interest isn’t the only reason why people put money in a savings account.
‘You need to get into the mindset of why people save. It’s not always for the interest rates; some people save for a rainy day, and if you disincentivise that, there could be repercussions if there is a period of job losses and people don’t have any money saved up.
However, he’s not sure it’s something we’ll need to worry about. ‘Bigger banks tend to be more resourceful and recover their fees from elsewhere; that’s why most banks in the UK don’t charge for current accounts,’ he explains. ‘So, they might choose not to pass on a negative interest rate to savers, but might recover those fees elsewhere by making other services more expensive.
‘This could reverse the trend of taking equities into cash, and encouraging people to invest more – but this comes with added risk, and might not be attractive to new investors.’
‘There are a number of factors that will affect how quickly the economy can return to normality. Inflation is very low at the moment, and things like consumers’ nervousness, or another coronavirus spike could mean the economic recovery could take a while.’
One thing that does look pretty certain is the continuation of paltry (just about positive) rates, which Kevin thinks will be here to stay ‘for some time’.