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Spend & Save

Five Questions About: Negative interest rates


Why has the Bank of England proposed negative rates?

It's a way to encourage banks to boost growth, instead of their cash reserves. It would work by allowing banks to earn 0.5 per cent Base Rate on a certain amount of reserves and then be charged 0.5 per cent on cash stashed above the limit.

What would that mean for my savings?

It could be a disaster. You wouldn't end up with negative rates – effectively a charge – but the move would apply more downward pressure on Swap rates, which would in turn hit deposit accounts.

But borrowing would get cheaper too?

It could open the door to cheaper rates, but probably only for existing borrowers. With interest rates so low for so long now, many lenders have separated the standard rates they offer existing borrowers from those offered to new customers.

Would it affect any of my other finances?

It could hit your pension savings as gilt yields – which annuity pay-outs are based on – would fall.

Will it happen?

It seems unlikely to be honest. Paul Tucker, the deputy governor of the Bank of England who proposed negative interest rates this week, said the proposal was just part of the Bank's "blue-sky thinking".