With the Governor of the Bank of England, Andrew Bailey, making it clear that negative interest rates could be a real possibility, it is time for investors, savers and entrepreneurs to start factoring in what these controversial measures could mean.
Bank of England will have little interest in savers
Aside from being the mainstay of financial prudence, saving will be at the bottom of the agenda for the UK’s central bank. Instead, as is the way with most economic recoveries, the preferred route is to encourage people to spend the economy out of a slump.
And, while this may sound like a cheerier alternative to the fiscal retrenchment focus the UK took following the 2008 crash, it certainly isn’t something to celebrate as a saver. In the process of trying to increase liquidity, banks will be told to encourage their customers to go out and use their money, rather than save it. As stated by IW Capital CEO, Luke Davis:
“A policy maker at the Bank of England has defended the potential use of negative interest rates, calling results from other countries ‘encouraging’. The move could effectively mean that savers pay to have their money with banks and are incentivised to borrow money and increase their spending.”
And it isn’t just your average saver’s account that will see consumers lose rather than gain money. Indeed, other vehicles which typically offer income for putting your money aside, such as bonds, will likely see participants lose, rather than gain money.
“Many government bonds and investments are already offering investors what are effectively negative returns on their capital once inflation and other factors have been taken into account.” says Mr Davis.
Andrew Bailey’s words in favour of negative interest rates, having previously been opposed to them, has seen ‘record numbers’ of investors turn towards equities and alternative assets such as gold.
Negative interest rates positive for new beginnings
While certainly true that negative interest rates are harmful for all those currently trying to save for a house, holiday or other costly venture, they are good news for anyone willing to roll the dice and borrow money to get a new project started.
Mr Davis believes that part of the paradigm shift that could be witnesses, will be the move in focus from what were previously thought of as ‘safe’ assets, to illiquid assets.
The main thing to note, however, is that negative rates mean that it is the opportune moment to borrow money. One way people could capitalise on this is to take advantage of both the stamp duty holiday and negative rates simultaneously (assuming such a situation comes to pass). On the other hand, banks are being increasingly stingy with mortgage application approvals – in some cases requiring a 20% deposit for properties where they would traditionally only ask for half that level of commitment.
Another way to take advantage of cheap borrowing would be to either expand or start up a business. This, Mr Davis states, is the perfect time for start-ups and SMEs to continue adapting, and take advantage of the opportunities offered by an economic rebound:
“There are a huge number of SMEs that have adapted quickly to the pandemic and the changes it has ushered in. Many are now primed to grow, create jobs and increase value for investors. There is huge volatility in markets at moment which is putting some investors off – but thinking long-term can offer a refreshing change of perspective.”
