Are negative interest rates on the way? Martin's view as the Bank of England asks lenders if they're ready for them
The Bank of England has written to banks asking them to provide details on how they would cope if interest rates were cut to zero or even turned negative.
Deputy governor of the Bank of England Sam Woods has told financial institutions across the UK they must be operationally ready for such a move, which has not been ruled out. It comes after the Bank of England base rate was cut to a record low of just 0.1% at the start of the coronavirus crisis.
The idea of negative interest rates, which have been used in other countries, is to encourage banks to increase lending because the Bank of England will charge them to hold their cash. But it raises the prospect of savers being asked to pay to hold money in a savings account.
Speaking on BBC Radio 5 Live earlier today, MoneySavingExpert.com founder Martin Lewis explained what the move could mean for mortgages and savings, plus gave his view on how likely such a move is.
You can listen to his full show on the BBC Sounds website, or play it via the Spotify player below. A transcript of his introductory comments is also below.
HM Revenue & Customs told MoneySavingExpert.com this week that if interest rates were to go negative, savers WOULDN'T be able to write off the loss against tax. So for example, if you made £200 interest over six months, then rates went negative and you paid £300 over the next six months, you would still be taxed as if you'd earned £200.
For how to make the most of your savings, including our best buys, see Top Savings Accounts.
Martin: 'This is still hypothetical at the moment – but if you're scared of negative rates, lock in with a savings fix'
Speaking on the show, Martin said: "What is an interest rate? Well I would define them as the cost of money. It's the price tag for money – so if I give you £100, and I say I want £105 back in a year's time, £5 is the cost, 5% is the annual interest rate that I'm charging you.
"That applies when we borrow money from the bank – they charge us an interest rate. And traditionally, when we save in a bank, which is of course effectively us loaning the bank our own money so that it can use it and generally lend it out to other people at a far higher rate, we expect an interest rate in return.
"Generally interest rates are positive, but we've seen in Japan and in Europe that they can sometimes go negative. So that means that, instead of when I lend you my money you pay me for the facility of having my money, if interest rates are negative, when I give you my money I have to pay you for the facility of you keeping my money and keeping it somewhere safe.
"The talk of negative interest rates to protect the economy I think is still a hypothetical one in the UK at the moment. We're not there yet. Top savings rates are dismal and dire, but they're still 0.96% – but if we imagine we move to a world where the Bank of England says interest rates are negative, what will happen?
"Well first of all, for those with mortgages and other debts, I wouldn't expect to see you paid a negative interest rate. What may happen for some who are on very low trackers is if we really went into negative interest rates, you could get a negative interest rate. But I think it's more likely that we'd drop to somewhere around 0% on those tracker rates for some people. So you wouldn't have any cost for borrowing money on your mortgage, which would help some.
"But far more devastating would be the impact on savers, because of course the way banks make their money is they charge more in interest than they pay when someone saves. Now we already have a number of UK euro bank accounts at the moment, where when you save with them you don't get any interest and they've started to charge a fee – which is effectively a negative interest rate.
"It costs you money to put money into those savings accounts and I think that is a plausible option, certainly for those with larger savings. If we go into negative interest rate territory, you will get no interest and you need to start paying a fee. Ultimately you'd say 'why don't I start keeping the money under the mattress?' Well, the answer would be that £85,000 per person per financial institution FSCS protection that you get from putting money in a savings account.
"This is all a great big hypothetical balloon right now. What everyone with savings should do certainly is make sure you're maximising your money. And if you're scared of negative interest rates, go and lock in with a fix, providing you won't need to withdraw money in that time."