Bank ponders a radical move into negative territory

Cuts in interest rates to zero per cent or less would be a further blow to savers already facing paltry returns, says Emma Dunkley

It hasn't been an easy ride for savers in recent years, but it could be about to get tougher after a senior official at the Bank of England proposed that interest rates are cut and pushed into negative territory.

Paul Tucker, the Deputy Governor of the Bank of England who mooted the idea last week to MPs on the Treasury Select Committee, warned the radical move would be "extraordinary", and hopes the constraints to setting negative interest rates would be considered.

Although the notion is aimed at banks to encourage them to lend more, it could see the paltry rates on savings accounts drop even further. But hard-pressed savers have already had to grapple with record low interest rates of 0.5 per cent, a level that has been in place for four years as of next week.

"A base rate cut, especially one that takes it into the negative, will clearly see more providers cutting the rates on more accounts, leaving savers unable to earn anywhere close to inflation," says Anna Bowes, a director of Savings Champion.

"For those who are dependent on their savings to supplement their income, a move like this could be disastrous and leave them unable to recover, even if rates rise again in the future, as they could have to eat into their capital to make ends meet," she adds. "It could also tempt savers to take greater investment risks in the hope of securing higher income."

The aim of imposing negative interest rates is to charge banks to store their cash with the Bank of England, making it less attractive for them to do so and more attractive for them to lend it out to housebuyers and businesses.

"At the moment, there's a huge build-up of deposits, so the reserve balances of banks – the money they have left over – they deposit with the Bank of England every day," says Jim Leaviss, a bond fund manager at M&G. "At the moment, banks are effectively earning interest of 0.5 per cent for doing this. If there's a penalty to not lending, then maybe that would stimulate economic growth."

It's not just the spectre of negative interest rates haunting savers. The introduction of the Funding for Lending Scheme, which provides billions of pounds to banks and building societies on preferential terms if they lend the money to businesses and individuals, has seen savings rates plummet.

"You could get more than 3.2 per cent on easy access accounts last year," says Ms Bowes. "But rates have come down on best buys, and they are now at 2 per cent."

There is also concern that banks could start adding a charge for current accounts, says Darius McDermott, the managing director of Chelsea Financial Services. "Most cash accounts are already lower than inflation, effectively losing people money in real terms," he says. "Savers are again being punished whereas spenders are being rewarded – and who got us into this mess in the first place?"

Negative rates wouldn't be bad news for everyone. "The winners would be those who have their mortgage rate linked directly to the base rate through tracker deals," says David Hollingworth of London and Country Mortgages. "While savers fear the worst, mortgage borrowers are hopeful. The Funding for Lending scheme, for example, has made mortgage rates cheaper. There could be a more competitive mortgage market, which would see rates come down further. "

Remember, too, that some tracker mortgage deals have floors, meaning the rate wouldn't reduce below a certain level or follow into negative territory.

Mr McDermott says it is worth putting some money into bonds or equities. "Bond prices may well rise on the back of any such action, and both bond and equities should make you more money longer term, although obviously this means people taking on more risk," he says.

There is a danger, though, of taking higher levels of risk. "Retail bonds are offering around 6 per cent – they look similar to accounts , offering fixed interest, over a fixed term, as long as the company doesn't go bust," Ms Bowes says. "But your money is at risk, as there is no Financial Services Compensation Scheme protection."

If your only source of income is from a building society deposit, returns have already been crushed, says Mark Holman, a bond fund manager at TwentyFour Asset Management. "As a result, many people have gone to corporate bonds. It's a consequence of lower rates – to get a reasonable return, people will have to take more risk."

The move to turn rates negative may kick-start bank lending and ultimately boost the economy, but savers would be dealt another major blow. With historically low interest rates already entrenched and providers still reducing rates, savers are only being pushed to take more risk with their money.

Emma Dunkley is a reporter at citywire.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Arts and Entertainment
Books should be for everyone, says Els, 8. Publisher Scholastic now agrees
booksAn eight-year-old saw a pirate book was ‘for boys’ and took on the publishers
Life and Style
Mary Beard received abuse after speaking positively on 'Question Time' about immigrant workers: 'When people say ridiculous, untrue and hurtful things, then I think you should call them out'
tech
Life and Style
Most mail-order brides are thought to come from Thailand, the Philippines and Romania
life
News
i100
Life and Style
tech
Voices
Margaret Thatcher, with her director of publicity Sir Gordon Reece, who helped her and the Tory Party to victory in 1979
voicesThe subject is being celebrated by the V&A museum, triggering some happy memories for former PR man DJ Taylor
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

    £24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Ashdown Group: Business Analyst - Financial Services - City, London

    £50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

    SThree: Trainee Recruitment Consultant

    £18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

    Day In a Page

    General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

    Chuka Umunna: A virus of racism runs through Ukip

    The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
    Yemen crisis: This exotic war will soon become Europe's problem

    Yemen's exotic war will soon affect Europe

    Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
    Marginal Streets project aims to document voters in the run-up to the General Election

    Marginal Streets project documents voters

    Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
    Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

    The real-life kingdom of Westeros

    Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
    How to survive a social-media mauling, by the tough women of Twitter

    How to survive a Twitter mauling

    Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
    Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

    At dawn, the young remember the young

    A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

    Follow the money as never before

    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
    Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

    Samuel West interview

    The actor and director on austerity, unionisation, and not mentioning his famous parents
    General Election 2015: Imagine if the leading political parties were fashion labels

    Imagine if the leading political parties were fashion labels

    Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence
    Public relations as 'art'? Surely not

    Confessions of a former PR man

    The 'art' of public relations is being celebrated by the V&A museum, triggering some happy memories for DJ Taylor
    Bill Granger recipes: Our chef succumbs to his sugar cravings with super-luxurious sweet treats

    Bill Granger's luxurious sweet treats

    Our chef loves to stop for 30 minutes to catch up on the day's gossip, while nibbling on something sweet
    London Marathon 2015: Paula Radcliffe and the mother of all goodbyes

    The mother of all goodbyes

    Paula Radcliffe's farewell to the London Marathon will be a family affair
    Everton vs Manchester United: Steven Naismith demands 'better' if Toffees are to upset the odds against United

    Steven Naismith: 'We know we must do better'

    The Everton forward explains the reasons behind club's decline this season
    Arsenal vs Chelsea: Praise to Arsene Wenger for having the courage of his convictions

    Michael Calvin's Last Word

    Praise to Wenger for having the courage of his convictions