Having flirted with the idea of negative interest rates for some time now, the Bank of England’s Monetary Policy Committee (MPC) finally confirmed that it could pursue the unconventional policy in the near future.
But what does it mean for UK investors?
With a mandate to target annualised inflation at 2 per cent, the MPC has kept rates at 0.1 per cent since last year when it cut them as part of a package of fiscal and monetary policies aimed at tackling the impact of the Covid-19 pandemic.
Since the start of the Covid-19 crisis in the UK, interest rates have been cut from 0.75 to 0.25 per cent, then to just 0.1 per cent – all in the space of eight days in March.
BoE Official Bank Rate over 10yrs
Source: BoE
More recently the MPC has begun to consult on negative interest rates as a way of stimulating growth.
However, at the MPC’s February rate-setting meeting on Thursday, the committee noted that “it would be appropriate to start the preparations to provide the capability to so if necessary in the future”.
As such, the MPC gave banks six months to be ready to implement negative rates.
Negative rates have been implemented by central banks in Europe, Scandinavia, and Japan in recent years as an effort to spur economic growth through spending and investment as savers become disincentivised to keep their money in loss-making accounts.
While the possibility of negative rates has increased, however, it still remains hypothetical for now.
“It has been seen as a growing likelihood amongst investors that this peculiar Japanese and European experiment will at some point be adopted by the BoE, but for now however its adoption has been delayed again,” said Charles Hepworth, investment director at GAM Investments.
“This wait-and-see approach is probably a better course of action than stumbling into the many pitfalls of negative rates and all that brings to the financial sector.”
Goldman Sachs Asset Management’s Gurpreet Gill does not regard negative rates as an effective tool for downturn periods, even if they are accompanied by a tiered system of reserve remuneration.
“The Covid recession is unique, but no central bank that had a negative rate entering this period has delved deeper into negative territory,” said the global fixed income macro strategist. “Central banks that haven’t yet ventured into negative rates may not wish to do so in this environment, at least not until the economic recovery is on more solid footing.”
Derrick Dunne, chief executive of Beaufort Investments, said that while the MPC are keeping their options open it’s clear that sub-zero rates are by no means its immediate preferred measure.
This is best demonstrated by the MPC’s unanimous decision to continue with existing quantitative easing measures and urged investors to avoid rash decisions, he explained.
“Investors making knee-jerk reactions based on speculation should be avoided, but it’s worth considering whether your current financial plan could withstand negative rates should the Bank decide to unleash this ammunition in the coming months,” said Dunne.
With investors in mind, Myron Jobson, personal finance campaigner at interactive investor, outlined the uncertain outlook for savers.
“The prospect of being charged to deposit cash into a savings account is likely to have huge ramifications on the nation’s savings habits, “he said. “Many might resort to taking the cash out of savings accounts and let’s hope people don’t resort to shoving money under the mattress.
“In the current low interest rate environment, many people turned to investments to make their money work harder for them. Long term this is encouraging but taking too little risk can mean that you won’t achieve your goals, just as taking too much risk can be harmful to your long-term wealth.”
Despite all of this, Andrew Bailey, governor of the Bank of England said, “My message to the markets is you really should not try to read the future behaviour of the MPC from these decisions and these actions we’re taking on the toolbox.
"Nobody should take any signal from this.”