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Will the Bank of England cut rates below zero?

by LLB Editor
30th Oct 20 10:13 am

Economic indicators have turned down ahead of next Thursday’s UK interest rate decision. Internet searches for “negative interest rates” are at a peak while negative interest rates – winners and losers
The magic money tree is alive, well, and within reach.

Laith Khalaf, financial analyst at AJ Bell: “The summer boom has faded since the Bank of England last met and the resurgent second wave of the pandemic has dented the economic outlook. We may get another dose of QE but the Bank is unlikely to rock the boat by imposing negative interest rates just yet given the state of flux in the pandemic and the economy.

“However they are clearly warming markets up for the possibility, having written to banks to check they can handle rates going below zero. Somewhat counterintuitively, they are likely to wait until economic conditions have improved a little because if banks are worried about loan losses mounting up at the same time their interest income is cut they may just curtail lending. That would be counterproductive from the central bank’s point of view.

“Experience of negative rates in other countries suggests that even if rates turn negative, most banks wouldn’t charge high street customers to hold money in their accounts, mainly because you can always take cash out of the bank and stuff it in a mattress. Those with higher balances would be most at risk because a bank account provides security that is hard to replicate without financial cost. While savers might not explicitly pay interest to their bank, it’s possible banks would introduce fees instead, something HSBC said it’s looking at in some markets.

“Savers have stuck away £88 billion so far into cash this year, as those who have been lucky enough to maintain their jobs and income have found their spending options cut down by COVID restrictions. Much of that money is losing value in real terms and will continue to do so if the Bank is successful in bringing inflation up towards 2%. They should be helped in this endeavour by the big fall in the oil price dropping out of the inflationary equation from next March.”

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