Bank of England (BoE) has dropped some hints on dropping the interest rate to negative after the current rate went to 0.1% rate. But you might be thinking that what is negative interest and how it is going to affect normal people?
As so much is going on since the COVID-19 pandemic, these things are creating many problems. How low will it go? Every question will be answered in this blog.
What does it mean by Negative Interest Rate?
Well, a Negative interest rate means that you can get an incentive as a business or customer by investing or spending your money rather than just keeping it in your account. It will also encourage banks to increase lending as BoE will charge people to hold their cash. It also means that you, as the customer, would have to pay the bank to look after your money. Also, borrowers would be paid to have a loan.
Think about it this way. Getting money for borrowing money and getting charged for saving money will want you to borrow more.
The reason behind going negative
The UK government has adopted the Quantitative Easing (QE) programme where the expansionary monetary policy allows the central bank to pump money into the economy. The reason behind this is to encourage UK corporations to rebuild supply levels. With more investment and money lending, economic growth can be triggered, saving all the trouble for the government.
But not to forget that it can weaken the currency and make exports much cheaper. Cheap exports mean that overseas customers can help in fueling economic growth.
What is the impact going to be on loans, savings, and mortgages?
A negative mortgage on this occasion will mean that the interest bill will be credited on the borrower’s account and will not debit. It will reduce the sum amount borrowed over time. The bank will reduce the outstanding capital helping the borrower to pay less. Another good thing that can happen for people on a tracker mortgage is that the interest rate can drop to 0%.
As we have already mentioned, savers will have the most negative impact. Who would have thought that they will get charged for saving money? Well, this can really happen for savers giving them a hard time. Well, everything is hypothetical right now.
But you must know that a negative interest rate means that the bond market will boost the UK market. The reason is that bond prices increase as yield decreases. It also means that the UK stock market will have a positive impact.
Has anyone in the world tried this?
Countries like Denmark, Switzerland, Sweden, Japan, and some other European nations. Sweden was the first one to try this in the year 2009, and the Swedish Central Bank cut out its interest rate to minus 0.25% to minus 1%.
The European Central Bank and Japan also cut out its interest rate to – 0.1%. At the same time, Switzerland had cut its interest to – 0.75% in the year 2015. Do you know that Sweden revoked the negative interest rate in the year 2019?
What issues the negative interest rate has?
A negative interest rate means it can become more difficult for banks if any loan defaults. They need to be more cautious to lend any money. Negative interest can be dangerous for old aged people who are already retired. Those people who are struggling financially and need access to cash are also under side effects. One of the most important things is to tell people how they will get charged for saving their money.
Are there any alternatives?
One of the best options is the expansion of Quantitative Easing (QE) in which the Central bank creates money and boosts it in the economy. It will help in keeping the interest rate lower while moving the economy forward. The UK government can also support the idea to shop more as it will help run the economy. Moreover, the BoE can keep on purchasing more bonds as it can lead to lesser borrowing costs and will encourage lending money.
Do you know that your day to day savings can lead to your bank account to zero one day? If you want to avoid that they don’t invest it. Use the old-fashioned ways to keep money safe at home for some emergencies. While you still wish to some emergency loan, then you can opt for text loans in which all you need to do is type and send ‘Need 1000 pounds now’ to the lender and get money even if you have bad credit.
While we understand this hypothetical situation can become true, you need to be more careful to be prepared for anything in the future. Keep adequate funds for an emergency so that you don’t fall into any problem at the time of need.
Description: Whenever we imagine that nothing worse can happen then something comes up to shatter our thoughts. With the interest rates so low, BoE hinting towards negative interest can change the whole game of finance.