IT appears the prospect of negative interest rates has moved up the agenda of the Interest Rates Committee at the Bank of England. Many members of the public wonder what this means and what the implications might be.
In simple terms the current position is that cash assets owned by depositors and paid into banks and building societies are rewarded in the form of interest. If negative interest rates were to be introduced, instead of an interest reward depositors would be charged by the financial institutions holding their cash deposits; defined as a negative interest charge.
Such a policy would be utter folly and this conclusion can be brought into sharp focus by two analogous examples from the business world. Imagine a vehicle rental company hiring out a car or a property company leasing a flat, not only at no charge but with an added cash bonus to the client. Basic debtor/creditor relationships would be turned on their head and generally accepted principles of economics would be "out the window".
That begs the question how we have arrived at this situation. Some years ago the government of the day passed responsibility for the setting of interest rates to the Bank of England. Currently the government has set the Bank of England a target of two per cent for inflation. Inflation and interest rates are closely linked. Under normal circumstances, if inflation is rising interest rates would be increased to reduce the supply of borrowed cash in circulation and incentivise savings. The converse is the case with falling inflation.
However, as a result of the Covid-19 crisis this is not happening. The Bank of England has reduced interest rates to a historic low of 0.1% to disincentivise savings and encourage spending in the hope jobs would be preserved and wealth created to help pay down record government borrowing. In fact the opposite has happened. Deposits with financial institutions are at record highs and the public are saving a greater proportion of their incomes than ever before despite the very low interest rates on offer.
The reason is the Covid-19 fear factor brought on by the threat of possible job loss, inevitable tax rises and general uncertainty surrounding the development of a successful vaccine. Against that background with interest rates as low as they are the Bank of England is already "running out of road" and its actions have had little or no effect. Moving to negative interest rates would solve nothing and would probably only serve to heighten the fear factor and make matters worse.
Lindsay Walker, Strachur.
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