Savings: Bank of England considers negative interest rates. How would your savings accounts be affected?

The prospect of negative interest rates was raised yesterday by Paul Tucker, a Deputy Governor of the Bank of England. Whilst most experts believe it is unlikely to happen, the thought will understandably send shivers down the spine of those of us with savings accounts.

The problems facing savers have been well documented; Bank base rate has been stuck at 0.5% since 2009, inflation is relatively high compared to savings interest rates, which in turn have fallen even further since the introduction of the Funding for Lending Scheme in August last year.

Negative bank base rate would surely be the final nail in the coffin for many savers.

How would negative interest rates work?

In a nutshell negative interest rates would mean banks and building societies paying for the privilege of holding money with the Bank of England; at the moment any money held with the Bank earns 0.5%.

Any movement to negative rate, suggested by Mr Tucker, would be made to encourage banks to increase lending to businesses. The logic being that banks wouldn’t want to pay for the privilege of holding cash with the Bank and would therefore incentivised to lend it to businesses, which in turn would help the economy.

How would negative interest rates affect your savings?

The most obvious answer is that interest rates on savings accounts would fall further.

It’s already impossible for tax-payers to get a real, above inflation, return on their savings and the options for savers using a Cash ISA (Individual Savings Accounts) are limited to just three accounts. Click here to see which Cash ISAs beat inflation.

Any cut in bank base rate would only increase the gap between inflation and the best buy savings interest rates, as banks and building societies would inevitably cut the interest rates paid on savings accounts.

Secondly, any move towards negative interest rates would hurt smaller building societies, perhaps even pushing them out of business or forcing them into mergers, further reducing choice for savers.

At the same time as raising the possibility of negative interest rates, Paul Tucker also turned his attention to Quantitative Easing (QE), the practice of pumping billions of pounds into the economy via the banks.

In a comment which will dismay would-be retirees, who have to contend with falling Annuity rates, he said: “nobody on this (Monetary Policy) Committee thinks that QE has reached the end of the road.”

QE has pushed down gilt yields over the past year, although they have risen from their lowest level in the middle of 2012, which in turn cuts the return on Annuity rates.

Will negative interest rates happen?

Most financial experts believe that Paul Tucker was simply raising the option of negative interest rates to gauge reaction and demonstrate that the Bank is being proactive in their thinking. If this was the case he will be left in no doubt this morning that the overwhelming reaction to the idea is negative.

Even Mr Tucker was tentative in his comments, saying: “This (negative interest rates) would be an extraordinary thing to do and it needs to be thought through carefully.”

One alternative option for the Bank of England is to follow the European Central Bank (ECB) model and offer a lower rate of interest to deposits it believes are excessive, this would discourage banks from holding larges amounts centrally, without hurting smaller building societies.

Worried about your savings?

Even before the comments yesterday from Mr Tucker many savers are increasingly concerned about their savings being eroded by inflation.

We can help. Our team of Independent Financial Advisers in Nottingham are experienced in making savings and investments work harder for you.

If would like advice on your savings or investments call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk