The coming of a new dawn? Negative interest rates and how savers can protect their money
Written by Trevor Keidan on August 08, 2016.
The Bank of England has just announced a cut in interest rates to just 0.25% in anticipation of a Brexit-fuelled economic slowdown. This is the first interest rate change since March 2009, when it was cut to a then historical low of 0.5% in the wake of the global financial crisis. The move is one of four measures being introduced, along with an extra $60bn in quantitative easing, in an attempt to stimulate the economy and prevent recession. The hope is that the lower rates will kick start the economy by encouraging banks to lend and consumers to spend.
Policymakers also warned that there is a strong possibility of further cuts in the near future which would bring the interest rate to zero and possibly lower.
The news comes hot on the heels of a warning from the RBS banking group, which owns NatWest, that negative interest rates are a real possibility. In a letter to 1.3 million business and commercial customers RBS warned ‘Global interest rates remain at very low levels and in some markets are currently negative. Dependent on future market conditions, this could result in us charging on credit balances.’ The impact on small businesses, already suffering in an economic climate of austerity and uncertainty, would be devastating.
For now banks are stressing that they have no plans to charge personal account holders negative interest on their balances. Switzerland, Sweden and Denmark already have sub-zero interest rates and I am aware of only one bank – Alternative Bank Schweiz (ABS) – which has passed these on to customers. Although interest rates on household deposits remain positive, banks compensate by ramping up banking fees. Usually these are higher than interest payments so consumers are effectively paying to keep their money in the bank anyway.
So how can consumers protect their savings? The answer lies in finding investment vehicles which can generate better returns. Of course we all need to keep a reserve of easily accessible funds in the form of an emergency fund and the safest option for this is still to keep it in the bank, rather than under the mattress, even if we have to take a small hit on earnings from interest. However, for money that we don’t need to access quickly, there are far better options than keeping it as bank deposits.
There is an enormous amount of choice when it comes to investment vehicles - from shares in individual companies, commodities such as gold, property, bonds or multi-asset portfolios. The one or ones that are right for you will depend on your financial goals, your time horizon and your attitude to risk. I would advise speaking to one of our highly trained professional financial advisers to clarify these. They will then be able to talk through the options in detail and help you select investments that are rising in value rather than falling due to negative interest rates. We look forward to hearing from you.