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Late last year, the Bank of England asked commercial banks if they are operationally ready for a negative base interest rate to manage the economic response to COVID-19.
It’s easy to see a negative rate being the next logical step and possibly the last roll of the dice for the UK’s monetary policymakers, who might well be running out of options.
This base rate dictates how much the Bank will charge commercial banks to borrow money from them. These commercial banks then charge consumers for taking out loans.
It never really did bounce back from the financial crisis of 2008, prior to which the base rate stood at 5.5% in December 2007. But with the current rate at an historic low of 0.1% – down from 0.25% in March 2020 – the Bank has little room for manoeuvre.
While there’s no precedent for this in the UK, this approach has been adopted in Japan, Switzerland, Sweden, Denmark where interest rates of 0% or lower were brought in to encourage borrowing and facilitate spending, rather than help savers.
Should the base rate turn negative, it would aim to make the borrowing market (particularly at a commercial level) more competitive. It would also be uncomfortable for companies to sit on cash.
Business owners using the commercial banks to save cash could expect to see any gains made through low interest rates disappear, while the banks, in theory, might even charge to look after your cash.
Negative interest rates will have next to no impact on credit card debt, personal loans or overdrafts. Borrowing costs and any charges for these will remain the same as the lenders’ own interest rates.
Business lending received a welcome shot in the arm last year – first through the business interruption loan scheme, then bounce-back loans. These won’t be affected if the base rate of interest turns negative as commercial banks are charging fixed rates of around 2.5%.
Most business loans are also provided at a fixed-rate of interest. This is where the interest paid is a set percentage of the loan value, and this percentage does not change. For loans taken out on a variable rate, a minimum interest rate usually kicks in which is always above 0%.
Theoretically, a negative interest rate could mean a business owner is paid to take out a loan, rather than having to pay any interest on it. This is highly unlikely, though. So, negative interest rates probably wouldn’t have a significant impact on business lending.
Last year, UKBF user OMGVape asked the forum how he “could best protect his hard-earned dosh [presumably sitting in a personal bank account] and the considerable amount of cash sitting in two business accounts”.
There is a slim risk of commercial banks feeling the pressure should interest rates turn negative, although the Government would probably bail out a failing bank like it did with Northern Rock in 2007.
Should the worst happen, the FSCS usually protects companies’ deposits, offering up to £85,000 if a bank, building society or credit union fails. Those institutions must be regulated by the FCA or PRA, though.
If a business is a limited company or LLP, it’s possible to claim up to £85,000 on both the business bank account and the personal account assuming they are both held with the same stricken bank.
The same double entitlement isn’t open to sole traders or partners in a business, although it would be possible to make a single claim of up to £85,000. It’s not possible to submit one claim per business partner.