Are negative interest rates on the horizon?

Last week, comments made from within the Bank of England (BoE) suggested it’s planning on introducing negative interest rates. These came from Silvana Tenreyro, who pointed out cutting the base rate below zero could help boost growth in the economy.

Tenreyro is one of the nine voting members in the Monetary Policy Committee, the group in the BoE that makes decisions on setting the base rate.

Rumblings on negative interest rates haven’t just come from within the BoE though. Markets seem to think we could see negative rates as early as May.

If the BoE do turn to the idea of negative interest rates, it would join the list of a number of other central banks that have already introduced them. This includes the eurozone, Switzerland, Japan and Denmark.

It’s already a tough environment for UK savers. Many high street banks pay just 0.01% AER/Gross* on instant access accounts, so they can’t go much further without turning negative. Is your bank on the list?

This article isn't personal advice.

What could this mean for banks?

Any future cuts to the base rate would hit the banks’ net interest margin. This is the difference between the rate they offer savers, and the rate they lend money out. It also means they would have to pay to keep large deposits with the Bank of England.

If they don’t want to drop savings rates on their products further, they might have to take a hit to profits or look at other ways to plug the gap. This could even mean charging people to have a savings or current account.

But this might not be the case for all banks. Unlike bigger banks, smaller banks will likely still need to offer better rates to bring money in and try to compete with the bigger, more well-known banks.

How could this impact your savings?

If you’re saving with a large high street bank, the chances are you’re not getting a competitive return on your cash. Many currently only pay £1 interest a year on a £10,000 savings pot for instant access accounts.

That’s not keeping up with the current rate of inflation, meaning your money is losing value over time. And if they do introduce charges, there’s a real risk your savings could lose value in real terms even faster.

You could think about saving with smaller banks and building societies. They usually pay a higher rate than large high street banks, so you could get a better deal. Like the big banks, your money could still be protected under the Financial Services Compensation Scheme (FSCS), where eligible cash deposits are protected up to £85,000.

If you’re worried about interest rates falling, you could also look at fixed term accounts. Unlike instant and easy access accounts where rates can change, with a fixed term account the rate is fixed.

You’ll get the same rate for the whole of the term – it doesn’t matter if interest rates go up, down or stay the same. Plus, these accounts usually pay a higher rate than instant and easy access accounts. However, with a fixed term you can’t access your money as easily, you’ll usually only be able to access it when the term ends.

You can normally fix from just a few months up to five years, although the choice with high street banks is currently very limited.

Make sure your cash is working harder

When interest rates are low, you might not think moving your savings is worth the effort.

Opening savings accounts with a new provider can be a lot of hassle – going through application forms and having to prove who you are every time. You’ll probably need to set up and remember new security information too.

Active Savings could help

One online account lets you pick and mix easy access and fixed term savings products from a range of banks and building societies. You’ll find a selection of rates, usually much higher than high street banks.

Once you’re set up, there’s no more paperwork or forms when you want to open new products. You can do it in just a few clicks. And it’s easy to manage, allowing you to see all your savings in one place, with any other Hargreaves Lansdown accounts you might have.

There are great rates to choose from, up to 0.30% (AER/Gross) on easy access and 0.55% (AER/Gross) on a one-year fix. There’s also a wide selection of products, including fixed terms up to three years. So, you should be able to find a mix of products that’s right for you.

*AER (Annual Equivalent Rate) - AER shows what the interest rate/expected profit rate would be if it was paid and compounded once each year. It helps you compare the rates on different savings products.

Gross - The interest rate without any tax removed. Interest/profits are paid gross. You are responsible for paying any tax due on interest/profits that exceed your Personal Savings Allowance to HM Revenue & Customs. Tax treatment can change.

Instant access products allow immediate withdrawals, the Active Savings service offers easy access products and withdrawals usually take one working day.

The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.