Savers ‘would be protected’ if interest rates go negative
Rates might go up on loans, but not on cash deposits – at least, with building societies.
1st February 2021 16:16
by Marc Shoffman from interactive investor
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Rates might go up on loans, but not on cash deposits – at least, with building societies.
The Bank of England will reveal how well banks could handle negative interest rates this week, but advance news suggests it may be not be all bad for savers.
Banks and building societies were asked at the end of last year to assess how ready they would be for a negative base rate environment.
The purpose of negative interest rates is to encourage banks to lend more and consumers to borrow more, stimulating the economy.
If a country's central bank sets its base rate below zero, high street banks must pay to deposit cash with it.
This means they could then pass the costs on to current account customers and savers and charge them for having an account, while there would be little incentive to offer high interest rates.
The Bank of England will deliver its findings on 4 February. But trade body the Building Societies Association (BSA) says a move to negative interest rates would be bad for the economy, and that banks would shield savers if this happened.
Mike Regnier, the chief executive of Yorkshire building society and the chairman of the BSA, warns negative interest rates could lead lenders to push up their mortgage rates to protect their profits.
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But savers could be protected, The Guardian reports.
Regnier says: “I can’t see a scenario where we’d charge our retail savers to leave their deposits with us.
“Banks would need to protect their net interest margins. If they can’t pass the rate cut through to their savers, they have to put rates up for borrowers, and that defeats the object of a rates cut.”
But Rachel Springall, finance expert for Moneyfacts, says savers should still be wary of negative rates.
She says: “Savers might feel like interest rates couldn’t possibly go any lower, but they would be wrong.
“In truth, the most flexible savings accounts could face further cuts should the base rate move any lower or if savings providers decide that they want to deter deposits.”
Springall warns that if service or holding charges come into the savings market, these will need to be considered carefully and charges should ideally be monitored by an independent body.
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