Worried about negative interest rates? Here is everything you need to know

Following the Bank of England’s recent announcement, there's a possibility that interest rates could go below zero in the not-too-distant future. Here’s what that could mean for you.

Why negative interest rates?

The Bank of England wants to help boost the economy following nearly a year of Covid-related disruption. 

When interest rates are positive, banks reward savers for holding money with them. When interest rates are negative, banks stop paying out the interest reward, and charge them instead.

By lowering the current 0.1% interest rate into the negatives, it’s hoped that banks, businesses and people will be more tempted to borrow and spend money than save money – effectively supercharging demand in the economy. 

Negative interest rates are a bit controversial as a method. Some argue this is counter-productive to the aims of the policy. It has never been tried in the UK before, although Japan, the eurozone and Switzerland have seen some success with this.

Will I be impacted by negative interest rates?

Should interest rates go negative in the UK, we will all feel the impact in some way.

If you invest in the stock and bond market, you may find the value of those investments go up if the interest rates do as intended and boost the economy and demand for goods and services, while bond yields (basically the interest you receive for holding them) goes down.

But most will feel it through their banks: because negative interest rates are bad news for banks, they tend to pass on the impacts to customers like you and me. So if you were receiving interest on savings in your account, you might expect that rate to lower, disappear, or even turn into a charge.

How will negative interest rates affect digital banks?

While big banks like Barclays and Lloyds can probably weather the storm and potential loss of customers without too much trouble, this is particularly worrying for digital banks (also called neobanks) like Monzo, Revolut and Starling.

These digital banks are new and low-margin. They usually offer free accounts and generally provide a decent interest rate on savings. These are some of their big selling points. But in all the pandemic chaos and a triggering of negative interest rates, even they can no longer afford to pay money to savers and will be forced to charge instead.

For them, loss of customers from this could be devastating to their young and growing businesses. What’s more, they will have to start paying interest to The Bank of England for the money they hold. Some may not have the funds on hand for this cost. Already lockdowns have forced them to cut staff and caused their valuations to drop.

At the end of the day…

Negative interest rates theoretically reward you for spending now instead of waiting. Inflation should rise with negative interest rates, meaning your money has more value today than it will in the future – a further incentive to spend it now to get more for your money.

Should the Bank of England trigger negative interest rates it might also be a good time to borrow money from banks, and you may be able to get favourable interest rates on a loan. 

But most importantly, don’t continue to count on your banks’ interest rate for additional cash. Now is a good time to look at the interest you are currently getting – Money Dashboard’s free money tracking app can help you do this – and decide if it’s worth keeping any savings in a banking account. You will probably find it’s not. 

Instead, it may be worth thinking about putting money into investments like stocks and bonds, which should do well if the economy is rebooted as planned by the negative rates.

Check out our related articles to learn more about investing:

Investing on a budget

Why should I invest?

What to do with your investment during a stock market crash

Disclaimer

All content is for informational purposes only and is the opinion of the author. Nothing on this website should be interpreted as "advice". Money Dashboard Ltd make no representations as to the accuracy, completeness, suitability or validity of any information on this site and will not be liable for any errors or omissions or any damages arising from its display or use.

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