The Prudential Regulatory Authority (the regulatory part of the Bank of England) that regulates the UK banking industry has written to banks and building societies telling them to prepare for negative interest rates.
What are negative interest rates?
Firstly, let’s look at positive interest rates:
Now imagine base interest rates have gone negative, will it be the reverse of the above?
In short, negative interest rates, unprecedented in the UK would:
Encourage people to borrow even more money and spend it in the economy, property, cars, goods and services. Thus boosting economic activity and creating inflation.
Encourage people NOT to save cash on deposit in banks or building societies. People that want to save will more likely be pushed into market related investments driving stock markets up or spending those funds thus creating inflation.
Banks will be encouraged to lend even more to businesses and consumers at cheap deals rather than ‘hoard’ it with the Bank of England.
We believe inflation is now the target of most governments to devalue covid-19 debts over say a 10 period. E.g. 5% pa inflation compounded over a 10 year period is 62%. This would mean a devaluation of national debt across nations.
What have other countries done?
We must expect similar results to any of the above in the UK if interest rates do go negative. We expect more stock market investment, more property investment and inflation. The one problem we do see is that of Building Societies. Under the Building Societies Act 1986 and subsequent amendments, societies are required to ‘borrow’ at least 50% of funds from savers to then lend to borrowers. If savers start withdrawing funds due to being charged for having money on deposit, this may have serious cash flow issues for societies and reduce mortgage lending capacity.
We live in extraordinary times.