There is a real possibility that the UK and other developed economies could adopt sub-zero interest rates, according to star manager Richard Woolnough (pictured).

Woolnough, who heads up three multi-billion pound fixed interest portfolios at M&G, believes the economic situation has gotten so extreme that central banks may be forced to go into uncharted territory.

“There has been the odd historical quirk when we’ve seen negative rates but that’s more for amusement than general investment consumption; however, there now appears to be the potential for a major investment climate change,” he said.

“Many G7 economies have implemented very low rates and quantitative easing for a number of years, yet still appear to be in the economic doldrums with high unemployment, low growth and limited fiscal room. It could now be time for a significant change in the investment text book as central banks experiment with rates below zero.”

While many believe negative interest rates are by their very nature impossible to implement, Woolnough thinks this is a plausible way of stimulating growth.

“Theoretically, a negative interest rate sounds simple – you put £100 in the bank and you get £99 back a year later if the rate is -1 per cent,” he explained.

“A rational investor would of course have the alternative of simply keeping their cash under the mattress and not suffering the negative rate, although the incentive to behave rationally would be limited by the administrative burden and security risk of holding cash.”

“The central bank could simply limit this activity by basically not printing enough cash. Therefore the vast majority of money would have to be held electronically and could therefore suffer a penal negative rate. Implementation of sub zero rates is possible.”

“From a central bank’s point of view this should be stimulative, as it would discourage saving and encourage consumption like any traditional interest rate cut. At the extreme you could create exceptionally low, zero, or even negative borrowing rates.”

Central banks including the Bank of England have come under growing pressure to lower rates from already historic lows. In a recent interview with FE Trustnet, Trevor Greetham said the UK government needs to perform a U-turn on its austerity plans or risk plunging the economy into further crisis.

Performance of manager versus peer group composite over 10yrs


Source: FE Analytics

Woolnough is one of the most highly respected fixed interest managers in the industry. According to FE Analytics, he’s returned 93.1 per cent over the last decade, compared to 53.41 per cent from his peer group composite.