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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 16:21Follow @cmarshallCW
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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