Professor Bart Lambrecht quoted by MSN Money on Britain’s historically low interest rates
Published 26 September 2011
Professor Bart Lambrecht of Lancaster's Department of Accounting and Finance is quoted in an article in MSN Money. The story relates to the latest minutes of the Bank of England’s Monetary Policy Committee in which the possibility of a further round of quantitative easing or another interest rate cut are being raised. With interest rates currently at 0.5%, does this raise the possibility of negative interest rates for savers?
Full story
Prof. Lambrecht explains that real interest rates are already negative for most savers. If a savings account gives an interest rate of, say, 2% and the expected rate of inflation is 5% then the real rate of interest is about -3%.
Another round of QE or a further interest rate cut therefore signals more bad news for savers as it will reduce real interest rates through either an increase in the rate of inflation or a cut in the nominal interest rate. This will mean a further erosion of households’ purchasing power.
Will QE or another interest rate cut benefit net borrowers? An interest rate cut would benefit borrowers whose rate of interest is directly linked to the Bank of England rate. However, deteriorating economic conditions also increase default risk. Any rate cut may therefore not be passed on by banks to new borrowers. Instead of an interest rate cut, the Bank of England may prefer to inject more cash into the economy. Cash that, ideally, ought to be targeted directly at borrowers who can invest it most efficiently to boost the economy.
Is it possible that nominal interest rates in Britain will become negative? While a nominal interest rate is technically possible, it is unlikely to happen in Britain under the current economic conditions. A negative interest rate would mean, for example, that savers pay banks for the privilege of depositing money with the bank. Savers may be willing to pay this price if they value the safety of their money above all else. Negative interest rates have, for example, in the past been imposed by the Swiss National Bank to deter excessive inflows of capital in periods of global economic turmoil when the Swiss Franc was seen as a safe haven. A situation like this is unlikely to arise in Britain in the near future.
There are, however, other more plausible ways how British savers could end up with nominal interest rates that are, in effect, negative. Many instant access savings accounts currently offer interest rates below 1%. If banks were to charge savers fees for maintaining the account, printing statements, withdrawing money from ATMs et cetera, then savers could end up having an after-tax rate of interest that is, in effect, negative.
Full story in MSN Money:
http://money.uk.msn.com/news/uk-economy/could-interest-rates-fall-below-05percent
