Negative Interest Rates a possibility?

by Neil Patterson

16:20 PM, 26th February 2013
About 8 years ago

Negative Interest Rates a possibility?

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Negative Interest Rates a possibility?

Paul Tucker the deputy Bank of England governor has told the Treasury Committee that negative interest rates should be considered.

A negative interest rate on bank reserves held at the Bank of England would theoretically encourage an increase in lending to stimulate the economy as banks would be charged for keeping money at the Bank of England rather than lending it out.

This is a very bold statement from the Bank of England and shows a new found aggression to tackle the stagnant GDP figures over the paralysing obsession to control the inflation rate. With the Bank Base rate already at 0.5% and Quantitative Easing having little effect despite injecting £375billion into the system maybe now with a new Governor due to start soon the timing is right.

The economy is however like the natural world where you can’t effect one thing without a corresponding negative effect on another. If you decrease interest rates you attract less foreign currency reducing the value of the Pound and making imports more costly such as fuel, and raising inflation rates, but your goods abroad are cheaper which should encourage exports and increase GDP.

Also for the last few years the banks have been forced to recapitalise, by holding more assets compared to the amount they lend in an effort to secure the banking system from future collapse. A negative interest rate would seem like encouragement to do the reverse. People may be encourage to spend and borrow more boosting the economy, but what about savers as the UK still has a very high debt per household ratio compared to other countries.

I really don’t know if this is a serious suggestion, or if it will ever happen, but I am pleased after the slowest recovery from recession in history that someone is finally thinking outside the box.

Now how about halving corporation tax to 11% for an idea. Surely it is better to get 11% of a very big pie than 22% of very little. All the big corporations might wake up “smell the coffee” and move their profits to the UK. It is the cost of Bureaucracy and a lack of incentive to achieve that is holding us back in Europe compared to other parts of the world in my opinion.


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Comments

Rob

18:21 PM, 26th February 2013
About 8 years ago

So if my mortgage is currently 1.75%+base thats=2.25% if they drop base to -0.5% my mortgage would be 1.75%+base of -0.5%=1.25%. Im very happy with that! Although i cant see it being that simple.

Mark Alexander

18:37 PM, 26th February 2013
About 8 years ago

Hi Neil

As a landlord the idea of a negative base rate appeals to me. As most of my mortgages are base rate trackers and charge me base + 1.75% then a rate of - 1.75% would so me nicely thank you very much. Ah, hang on a sec, I'm dreaming!

Your suggestion of halving corporation tax is far more simple and probably more likely to have a positive effect on the economy in my opinion. However, the Bank of England has absolutely no influence over our tax system. Perhaps we should import a Canadian Prime Minister too?

Mark Alexander

20:05 PM, 26th February 2013
About 8 years ago

I can't stop thinking about this now and the more I do the more I like this negative interest rate idea.

I appreciate it's sticking two fingers up to savers but what are they likely to do about it?

What will happen to property prices if everybody with savings sees property as a good investment and they all pile in?

If they do values might rise enough to persuade developers to build more.

Where will the builders come from?

Well my guess is Eastern Europe.

Where will they live?

Well I suspect they will have to rent.

What will that do to rental demand?

If lenders are forced to actually lend what will happen to lending margins as competition intensifies?

So that's rental demand up, property values up, interest rates down - could we ask for more?

With the changes in planning now allowing offices to be converted into residential more easily there is plenty of scope for development if profitability is there.

Could all of this restore the "feel good factor" we have been missing for so long?

Might all the extra money in the economy from property re-kindle other sectors such as financial services etc.?

By my reckoning this might actually work!

Neil Patterson

9:43 AM, 27th February 2013
About 8 years ago

I think Mark is right it may have a positive effect on the PRS however it is almost completely untried as a way to stimulate an economy.

However I think it is worth taking a few gambles now as Government seems unable to make any difference.

Annette Stone

12:36 PM, 27th February 2013
About 8 years ago

I think this is a brilliant idea for all of us with investments BUT the man in the street is going to panic, especially elderly people who have seen their returns on their savings eroded to almost nothing.

It also does not bode very well for the future because if the idea is to stimulate spending rather than savings what will happen in the future in terms of care for the elderly etc.

Bit swings and roundabouts this one and I cannot see lenders giving borrowers on base rate trackers at .5% above base as my mortgages are an actual refund. There will be a lot of small print in this one

16:34 PM, 27th February 2013
About 8 years ago

This is a foolish idea. It won't stimulate the economy but cause saver bank runs.

The solution is to raise interest rates not lower them. Then the economy can reset and market bubbles collapse. After all banks need savers money so they can lend loans and mortgages

Why should the prudent savers continue to bail out the bankers and those who borrowed recklessly. Isn't years of extra low rates enough?


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