The Bank of England has now written to the UK retails banks, making sure they are prepared for negative interest rates!! This is not a new thing (on the international stage anyway), Japan and Switzerland are both trail-blazers in this regard but what is happening and what would this mean to your wealth?
Under any “normal circumstances”, you put your money in a retail bank and receive a rate of interest (no matter how low this may be). When you borrow money, you pay the retail bank a rate of interest and simply put, this is one of the ways the bank can make profit.
However, when retail banks (NatWest, Barclays, Lloyds, HSBC, etc) have money left at the end of the day (ie: the surplus of their deposits minus lends made) – they then use the Bank of England as their “banker” if you like. If the Bank of England then uses a negative rate, the bank (say Barclays in this example) has to effectively pay the Bank of England an “interest penalty” on money not borrowed out. The theory then goes, if you were Barclays you would be incentivised to make sure you borrowed out every penny that you have (and thus boosting the economy given the money can then be spent).
What will this mean for “real assets” such as shares etc? If there is a load more “liquidity” in the system (liquidity = available cash) you may expect atleast some of this to find its way into investments. Again, under normal circumstances, this could cause shares to rise, yields on Government and corporate bonds to decrease but these are NOT normal times!
As always, we continue to alter our portfolios regularly depending on what is going on in the real world, if you are worried, get in touch with your local experts to ensure your very own Financial Fortress!!