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Negative interest rates: winners & losers

Banks and savers should be glad that plans for negative interest rates remain in the realm of 'blue sky thinking'.


by Chris Marshall on Feb 27, 2013 at 16:21

Negative interest rates: winners & losers

Bank of England policymakers have discussed introducing negative interest rates.

So far it has just been ‘blue sky thinking’, according to Charlie Bean, deputy governor of the Bank, who was speaking today after the press pounced on comments from his colleague Paul Tucker yesterday that negative rates could be considered.

But other central banks have implemented negative interest rates before so it’s not an entirely theoretical idea.

The most immediate impact would be on commercial banks. They hold money with the Bank of England with an interest rate of 0.5%. A negative deposit rate for banks would, on the face of it, mean the banks would start paying to keep their money in Mervyn King’s coffers.

This ‘penalty’ or ‘tax’ on the banks – as economists are starting to call it – would be intended to encourage them to use the money elsewhere instead.

Lenders that have a lot of tracker mortgage business – ie, loans linked to the current 0.5% Bank base rate – would particularly suffer as their margins would be squeezed. They would have to reduce mortgage rates further, benefiting existing borrowers and hardly providing an incentive to attract new ones.

They could feel forced to cut savings rates even lower to compensate.

So like all ‘taxes’ on banks, it would be the end consumer who pays.

This reduction in savings rates could ultimately exacerbate the current hunt for yield which is distorting markets as investors cut their bank cash holdings even further.

The Bank of England does of course know all of this, hence it hasn’t implemented such a policy so far.

If the Bank of England were to set negative rates, it might not be a straightforward cut in the deposit rate on offer at the central bank (which is theoretically different from base rate, which is the rate the Bank of England charges for banks to borrow, not make deposits).

The Bank could be more subtle and introduce some kind of staggered system for different levels of reserves it looks after for commercial banks, rather than a sweeping deposit cut. Keep too much on reserve and then a bank pays the negative rate.

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12 comments so far. Why not have your say?

Chartered Accountant

Feb 27, 2013 at 16:49

Surely this falls into the category of "grey sky thinking".

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Feb 27, 2013 at 17:05

I think this article should make clear what the base rate is.

It is the rate at which the Bank of England lends to financial institutions (the market) with the deposit of a security (like a government bond).

So if you own a government bond with a face value of £1 million you could deposit that with the Bank of England and they would give you £1 million cash with an interest of their base rate. Proposed to be -0.5% by Tucker.

This surely means that anyone who owns government bonds will deposit them in the Bank of England and get a kick back (in the form of -.05% interest) for doing it. In the mean time it would spell misery for any saver.

Like QE this is just another way for the government to fund the deficit.

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Feb 27, 2013 at 17:23

His surname should start with F the brainless prat.. Another move to give his banking mates seven figure bonus . What does CAM & OS think, assuming they can

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clive chafer

Feb 27, 2013 at 20:58

Why not just confiscate everybody's savings and give them to the borrowers free-of-charge and be done with it! It really is too pathetic for words.

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Roger Savage

Feb 27, 2013 at 21:06

Clive - I couldn't agree with you more.

The financial system is being re-engineered to benefit all the wrong people - bankers, the feckless, housebuilders, the 'I want it now so I'll have it' brigade, etc...

Is it any wonder that the new BoE governor is a Goldman Sachs man?

This story also fails to explain at all why "savers should be glad" at this latest moronic proposal.

They don't want to fix the system, they want to keep spinning the plates and create hyperinflation.

Any decent economist would recoil in horror at everything that has happened over the last 5 years (and the liberalisation of debt and change in attitudes to debt leading up to the 'credit crunch').

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Geoff Downs

Feb 27, 2013 at 22:26

They have been trying to create inflation for four years. How many times have economists predicted interest rates would rise because of inflationary pressures.

Now they are talking of negative interest rates, so where's the inflation?

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Feb 27, 2013 at 23:06

Geoff Downs

I think you are a bit of an idiot. The Bank of England have an inflation rate target which has been exceeded every month for years. They are probably going to give up on the inflation rate target as it is almost invariably over the target. It is so easy for a Bank to create inflation, they just need to print money, just look at the idiots in Zimbabwe.

Why do you think they are trying to create inflation?

What do you think inflation will do to improve the economy?

If inflation is high and pay rises are low then every one is worse off. So do you think that is what should be the main aim (to make peoples salary smaller in real terms)?

If pay rises are above inflation then people are better off, it's really the difference in inflation and pay rises that is important.

If inflation is above interest rates thn saver are worse off but borrowers are better off.

When are you going to get it out of your thick head that inflation is not something that is difficult to achieve?

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Feb 27, 2013 at 23:22

Jonathon, keep it civilised.

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Geoff Downs

Feb 27, 2013 at 23:28

The inflation we have in commodity prices is being caused by financial speculation, with such things as ETF's.

Therefore we are seeing energy and food inflation in particular. Otherwise inflation is low and not a major problem.

Your problem Jonathan is you fail to grasp that QE will not cause inflation unless the money gets into bank lending and therefore into the real economy.

I didn't post to get a response from you because we have been over this subject before.

You have repeatedly said we will get hyper inflation and interest rates will have to rise. It's no use repeating your theory about how easy inflation is to create, you need to look at the facts. The facts are that inflation is benign.

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Geoff Downs

Feb 27, 2013 at 23:29


Well said, even if I am an idiot, he doesn't have to tell everyone.LOL

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Feb 27, 2013 at 23:44


Inflation is calculated on a shopping basket. Some things have been rising faster than others but the basket which is used to measure inflation is above target. It is higher than the Bank of England's remit. So inflation is high and easy to make as high as they want. In Zimbabwe 100 trillion dollars would buy you six eggs, in Weimer people need wheelbarrows full of money just to buy loaves of bread. I'm not saying we will get hyper-inflation but just illustrating with extreme examples that high inflation is very easy for a central bank to achieve, and the current inflation is higher than the BOE target. Historically there has never been any economy that has been rescued or placed any better place by printing loads of money.

What things do you the government should be trying to inflate? Wages, pay rises, house prices, what items do you think should rise?

What QE is achieving is it is allowing the government to borrow money at low interest rates, so it's a way they can keep a large deficit and afford to pay the interest, that's the main reason. And it's not just me who is saying it, Stephen Hester, bought in by the government to mangage RBS has said it: Richard W. Fisher, president of the Federal Reserve Bank of Dallas has stated that the FEDs money printing for QE is structured to just fund the deficit: "The math of this new exercise is readily transparent: The Federal Reserve will buy $110 billion a month in Treasuries, an amount that, annualized, represents the projected deficit of the federal government for next year. For the next eight months, the nation’s central bank will be monetizing the federal debt."

Inflation is a side effect of policies that are made for other reasons. If the BOE could control inflation it would stay at 2% not the current higher rate.

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Roger Savage

Feb 28, 2013 at 19:19

Jonathan, I think your argument is spot on.

Conversely, I'm at a loss to see things from Geoff's perspective, that inflation is benign.

I think Geoff is relying too much on what he's told (i.e. manipulated satistics) vs. reality.

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