Would negative interest rates be good for the UK? COMMENT: David W Williams, Chair, North Wales Business Club.
N life there is much to be said for the old adage "be careful what you wish for".
ITherefore a few years ago, before the economic meltdown of 2008, we had business owners and mortgage holders wishing for lower interest rates on their borrowings. Depositors on the other hand wanted an extension of high returns on their savings. And so to 2016 where it is arguable whether either sector, borrowers or depositors, are content with the current position.
Certainly depositors are scratching around for interest rates that make it worthwhile leaving their money with financial institutions. But will a time come when the Bank of England , through the MPO, imposes a negative interest rate (NIR) and at that stage will commercial banks start charging customers to deposit their funds ? Already we see NIR applied in a number of European countries. For instance the Swedish central Riksbank has cut from - 0.35% to -0.50%. Denmark and Switzerland are other central banks that are experimenting with NIR. Indeed the European Central Bank itself has been applying NIR to banking deposits and the key question is when will the large banks pass on the NIR that they are charged to us humble bank customers.
One thing is certain - the deeper the central banks apply NIR the closer it gets to us real customers being compulsorily invited to the Mad Hatters Ball of paying a bank to deposit our money.
Earning interest is deeply ingrained in our psyche - however the opposite can happen. Banks can, under certain conditions, take a percentage of your cash from your account in the form of NIR. The theory is that you would not then keep cash in the bank but withdraw it and , more importantly, spend some of it and in that process create economic growth . So far so good but what would happen in the real world. ING the Dutch-owned bank asked 13K customers what they would do if interest rates on their deposit accounts fell to -0.5%. Overall 77% said they would take money out of their accounts either to invest elsewhere or put it in a safe place - maybe under the bed ? Fewer than 10% would take money out to spend more. So much for a central banks approach to stimulus for spending.
What about business and their borrowing rates? Surely NIR is good for them. In theory interest rates below zero should reduce borrowing costs for companies and households, in turn driving demand for loans. In practice however, there is a risk that the policy may do more harm than good.
There is the danger that customers will decide to keep their money under the bed, thus robbing banks of a vital source of funding.
Also if banks absorb the cost of NIR, then the crucial margin between their lending and deposit rates (their profit) will be squeezed so hard that it will make them less willing to lend.
As I said at the outset, we must beware what we wish for. We are moving into uncharted territory and all this to the background of the EU Referendum.
Best of luck and I can recommend a very good shop for quality mattresses!