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The Bank of England took a step closer to introducing negative interest rates for the first time on Thursday, after it gave lenders six months to prepare for such a move.
The Threadneedle Street Monetary Policy Committee (MPC) voted unanimously to keep the official interest rate at historically low levels, while agreeing to set the deadline for banks to prepare after lawmakers said they were ready to do that. negative interest rates were part of his toolkit.
According to the minutes of the MPC meeting, officials were divided over asking lenders to implement the necessary measures to ease negative loan and mortgage rates, with some fearing this would signal to investors that the central bank planned to move forward. in the next. few moths.
Questions and answers
What would negative interest rates mean for UK consumers?
What would happen to my mortgage?
If it is a fixed rate mortgage, a cut in interest rates would mean no change. Most homes have these types of agreements: in recent years, approximately nine out of 10 new mortgages have been taken out at a fixed rate.
If it’s a variable rate mortgage, a tracker, or a mortgage on or tied to a lender’s standard variable rate, the rate could drop slightly if the base rate is lowered. But the drop is likely limited by terms and conditions.
Older mortgages often have a minimum rate specified in fine print. The national construction society, for example, will never reduce the rate that it tracks below 0% on mortgages contracted since 2009, so if your mortgage is at the base rate plus 1 percentage point, it will never fall below the one%. Santander specifies in some mortgages that the lowest rate it will charge is 0.0001%.
You will have to look through your paperwork to see how low your mortgage rate might be.
Will the new mortgages be free?
In Denmark, borrowers have been offered mortgages with negative interest rates. Jyske Bank’s mortgage customers were loaned money at a rate of -0.5%, which meant that the amount they owed was reduced each month by more than the amount they had repaid. There is no reason why UK lenders cannot do the same.
What about my savings?
UK savings rates have already been hit by the two base rate cuts in March and many easily accessible accounts at large banks pay just 0.1% interest.
Some banks already charge for checking accounts, but it is unlikely that you will soon be forced to pay to keep small sums on deposit; Despite the low base rate, it is possible to earn 1% or more on a fixed term savings account.
Wealthy savers are likely to be the first to face a charge. In 2019, UBS began charging its ultra-wealthy clients a fee for cash savings of over € 500,000 (£ 449,000), starting at 0.6% per annum and increasing up to 0.75% on larger deposits. And at Jyske Bank, similar fees apply.
What about my pension savings?
Negative interest rates are bad news for pension funds. If you have a defined contribution plan, your expected retirement value may decrease and you will need to invest more if you have a planned end date in mind. It is also a bad time to buy an annuity to provide retirement income, as the returns on these fall when rates are negative.
But the committee agreed that to include a below-zero interest rate cut in the suite of measures available to policymakers, lenders would have to implement technical requirements that allow them to implement it at short notice.
It is feared that negative lending rates, which are expected to reduce borrowing costs for households and businesses, would force large banks and credit unions to offer negative savings rates.
Savers would suffer a loss of income and pension funds, which also depend on savings deposits, would also be affected.
Officials said the balance of risks in the economy, mainly from new variants of Covid that outweigh the benefits of the current vaccination program, meant that it was necessary to keep rates low. The negative loan announcement came as MPC members voted unanimously to keep the official interest rate at the historically low level of 0.1%.
GDP is expected to fall around 4% in the first quarter of 2021, in contrast to expectations of an increase in the November report.
However, the Bank expects growth to pick up as the NHS vaccine program takes effect and schools, universities and most businesses return to more normal levels of activity.
The Bank’s quantitative easing bond purchase program was unchanged at £ 895bn after injecting an additional £ 150bn into the economy at the start of the second lockdown in November.
Earlier this week, the president of the Association of Building Societies said that reducing the Bank of England’s lending rate below zero would force institutions to subsidize savings rates to keep them positive, leaving them no choice but to recoup. the costs of higher mortgage costs.
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Mike Regnier, who is also the CEO of the Yorkshire Building Society, said that introducing negative rates would hurt consumers and the wider economy.
“I’m afraid this would have the opposite effect of supporting the economy, as rates would go up for borrowers as banks protect their margins,” he said.
The Bank of England base rate, which fell to 0.1% last March as the UK prepared to enter its first lockdown, is the cost to high street lenders of borrowing money from the central bank, They must offer mortgages and loans to homes and businesses.
