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12 Oct 2020

Bank of England considers negative base rate: will banks charge to hold your savings?

We asked savings experts for their views on what a negative interest rate could mean for savers

The Bank of England has sent letters to the CEOs of several financial firms to ask how their company would cope if the Bank were to reduce the base rate to 0% or to introduce a negative rate.

The letter, sent out on 12 October, has asked for voluntary responses by 12 November, ahead of the Bank's final Monetary Policy Committee (MPC) meeting for this year, on 17 December.

If the base rate was to go negative, it would be a UK first. But what would the impact be for savers? If banks pay you interest when the base rate is positive, could a negative interest rate mean you have to pay your bank to hold your cash?

Here, Which? explains how a negative base rate could work and asks several savings experts for their views on what could happen to the savings market.

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Why is the Bank of England considering a negative base rate?

The topic of negative interest rates has been discussed since back in June, when the governor of the Bank of England, Andrew Bailey, said officials were 'considering all options' to help the British economy in the wake of the coronavirus crisis.

It's been the topic of speculation several times since then; most recently because it was recorded in the minutes of the last MPC meeting on 17 September that the BoE and Prudential Regulation Authority (PRA) would continue to 'assess the appropriateness' of implementing a negative base rate.

As a result, Sam Woods, deputy governor and CEO of the PRA, wrote to the CEOs of several financial firms asking how their companies would be affected by a negative base rate, and what would have to happen for them to be ready for such a decision.

In theory, a negative base rate is a way to get people to pump money into the economy. As we've seen with lower base rates, an environment is created where savings are unattractive, but spending is easier - especially if banks pass cheap rates to their mortgages and loans.

To date, the BoE has repeatedly said negative interest rates are just one of many 'tools' it is considering as a way to ease the economy towards its 2% inflation rate target.

What could a negative base rate mean for saving accounts?

The Bank of England base rate determines how much banks are charged for borrowing money. The banks use this money to grant customer loans and then make a profit by charging interest on the repayments.

A high Bank of England base rate means banks are more likely to offer high savings rates, as using savers' deposits to fund the bank's loans is cheaper than borrowing from the central bank.

If the base rate is low, being able to borrow cheaply from the Bank of England can be far more attractive than having to pay interest to savers - which is why banks may then reduce their rates or pull particularly popular savings accounts.

It's not clear whether a negative base rate would mean banks are paid to take out loans, but it does suggest that offering generous savings rates could become even less of a priority - something we've already seen in the wake of base rate reductions that have already happened this year.

What's happening to savings rates now?

Savings rates have been in decline for some time, but the rate drops and account withdrawals have picked up speed since the Bank of England reduced the base rate to an historic low of 0.1% in March.

The graph below shows how average savings rates have changed over the past year, using data from Moneyfacts. A 'long-term fixed-rate savings account' is categorised as any terms more than 18-months long.

As the graph shows, interest rate reductions picked up pace in March and subsequent months - levelling off between August and September, and in some cases even increasing slightly into October. However, rates are still far below pre-pandemic levels. The average long-term account rate has fallen by 0.44% since the lockdown began in March.

Those who got a one-year fix in November 2019 would have received an average rate of 1.28%; but now the average rate is just 0.68%. In fact, even today's top-rate one-year fix offers less than the average rate last year.

As for instant-access rates - the accounts many flock to in times of economic uncertainty - today's average of just 0.23% is less than half what it was this time last year. While a few market-leading accounts offer just over 1%, many only pay 0.01%.

Getting the highest rate for your savings is important to make sure your pot keeps up with inflation, which measures the rising prices of goods. If your interest rate doesn't equal or exceed the rate of inflation (in August it stood at 0.2%), your savings will effectively lose value over time. As prices rise, this means you'll be able to buy fewer things with the same amount of cash.

The graph below shows how inflation has changed since 2015, using data from the Office for National Statistics (ONS).

Negative interest rate predictions: what do the experts think?

It's hard to know what the financial industry will look like if the base rate turns negative, so we've asked several experts in the savings field for their thoughts on what could happen.

Sarah Coles, personal finance analyst at investment firm Hargreaves Lansdown

As to how likely it is that we'll see a negative base rate, Sarah says: 'It's worth underlining that for the Bank of England, this is simply one of many considerations on the table. It would be a major change in policy, and not one we're expecting imminently.

'When other central banks have brought in negative rates, some banks have passed this on by introducing fees for savings accounts. But largely they have tried to avoid it, because they don't want everyone to withdraw their cash.

Crucially, even if some banks were to charge for savings accounts, Sarah doesn't think it will be the case everywhere.

'Whatever happens to the Bank of England base rate, there are a wide range of savings rates on offer; the same would apply if the base rate went negative,' she says. 'It means that, whatever the Bank of England decides to do with central bank rates, it's important to shop around for the best possible home for your savings.

'At the moment, rates are falling across the board. So if you're planning to tie up some of your savings for a fixed period of time in return for more interest, it's worth doing so sooner rather than later.'

Kevin Mountford, co-founder of savings platform Raisin UK

While a negative base rate is being considered as one option to kick-start the economy, Kevin points out that earning interest isn't the only reason why people put money in a savings account.

'You need to get into the mindset of why people save. It's not always for the interest rates; some people save for a rainy day, and if you disincentivise that, there could be repercussions if there is a period of job losses and people don't have any money saved up.

However, he's not sure it's something we'll need to worry about. 'Bigger banks tend to be more resourceful and recover their fees from elsewhere; that's why most banks in the UK don't charge for current accounts,' he explains. 'So, they might choose not to pass on a negative interest rate to savers, but might recover those fees elsewhere by making other services more expensive.

'This could reverse the trend of taking equities into cash, and encouraging people to invest more - but this comes with added risk, and might not be attractive to new investors.'

'There are a number of factors that will affect how quickly the economy can return to normality. Inflation is very low at the moment, and things like consumers' nervousness, or another coronavirus spike could mean the economic recovery could take a while.'

One thing that does look pretty certain is the continuation of paltry (just about positive) rates, which Kevin thinks will be here to stay 'for some time'.

Anna Bowes, co-founder of savings advice website Savings Champion

Anna says a market where all banks and building societies charge customers on their savings is 'unlikely' - but it could be adopted by some providers.

'The high street banks are already paying as little as 0.01% on easy access accounts - so there is little wiggle room to cut rates further.

'Could they start to charge customers on their savings - in the way that some current accounts charge a fee? If they did, it could be the catalyst to get loyal savers to move their money from their bank.

'However, the worry is that if they do withdraw their funds, they keep it stashed under the metaphorical mattress, which would create a big security risk.'

Anna thinks there will still be savings deals available, but not necessarily from the big banks. 'There are likely to still be plenty of savings providers who will be keen to continue to raise money from savings customers.

'We'd expect to see accounts still available which pay at least some interest - but it's more likely that these will be providers that are relatively unknown.'

Are there any upsides to a negative interest rate?

As bad as things could look for savers, those who need to borrow from banks could benefit from negative interest rates, as loans and mortgages could become very cheap.

'Those in the position of having credit and savings might at least be able to neutralise the effects; balancing out their negative savings with cheap credit,' says Kevin. 'However, the banks' terms might not change enough for this to be effective - for instance, if there are minimum loan rates.'

Sarah Coles agrees. 'If savers have mortgages, they might benefit from the flipside of negative interest rates,' she says.

'Overwhelmingly, banks don't tend to offer mortgages with negative interest rates, or give rebates to borrowers. There have been a few isolated examples, but they tend to come with such high fees attached that, in practice, you're not being paid to borrow.

'However, lenders do tend to offer lower rates to new customers, and mortgages to a broader base.'

This article was originally published on 7 June 2020 when the Bank of England announced it was holding the base rate at 0.1% until the next MPC meeting. It was last updated on 12 October 2020 with details of the Bank of England's letter asking financial firms about their readiness for a potential negative base rate.