Negative interest rates are back in the Bank of England shop window.
Few pundits believe such a scenario will actually happen, not least because it could hurt both borrowers and savers.
Nevertheless, it remains an option.
The Bank revealed in September that it was exploring the possibility of taking rates below zero if necessary.
It asked British banks in October about their preparedness.
Now, it has in effect told them to get systems and processes in place within six months.
The Bank emphasised, however, that it is not suggesting negative rates are inevitable.
As I noted back in October when outlining the ins and outs of the strategy in a previous article, it has been operating in the Eurozone, Japan, Switzerland, Sweden and Denmark.
Negative rates effectively pay businesses and individuals to borrow money and penalise banks for depositing cash, therefore in theory encouraging them to invest and spend more. Yet the evidence is patchy as to whether this actually results in practice.
Savers, already suffering, would face further misery. A negative base rate is likely to lead to more accounts paying zero per cent or only slightly above, meaning the value of deposits is ever more eroded by inflation. Wealthy savers could take a hit for holding large sums of money on deposit – UBS already imposes charges for ultra-rich clients. HSBC has said that low interest rates may lead to it introducing fees on its current accounts.
Lenders might increase the margins on new tracker mortgages, so that the percentage rate you pay above the base rate is higher than on the current deals. They certainly do not want to pay borrowers who have mortgages with them.
Not surprising then that few in the financial world see the point of the exercise.
Speaking to CNBC, neither Gurpreet Gill, macro strategist for global fixed income at Goldman Sachs Asset Management, nor ING Developed Markets economist James Smith were keen.
Ms Gill thought any move by the Bank unlikely this year.
She added: “We don’t regard negative rates — which could adversely impact the banking sector — as an effective tool for downturn periods. Central banks that haven’t yet ventured into negative rates may not wish to do so in this environment, at least not until the economic recovery is on more solid footing.”
Mr Smith maintained the Bank’s Monetary Policy Committee appeared to have “limited enthusiasm” for negative rates.
He stated: “The Bank’s latest forecasts make it clear policymakers don’t see the need for further stimulus. Its projections now assume the economy will regain all lost ground by the fourth quarter, and that unemployment will only be marginally higher at this point next year.”
In a research note Neil MacKinnon, global macro strategist at VTB Capital, commented: “There is no need for negative interest rates because they’re bad for savers and bad for banks. We can look at the impact on the Eurozone for proof of this. Once the lockdowns are gradually lifted in response to a successful vaccine programme, fiscal support can pave the way for getting the UK recovery back on track.”
However, accountancy giant PwC thinks negative rates could be coming.
It commented: “Negative interest rates in the UK are no longer impossible. They’re a very real prospect.
“There may be mixed support, but we may have little choice but to adapt to global trends.
“Banks and boards can no longer ignore the possibility that interest rates may go below zero. Whether it happens or not, we’ll certainly see low rates for longer, and businesses should accelerate change to be ready.”
All in all a fiscal can of worms.