The Bank of England’s Monetary Policy Committee (MPC) has written to banks asking them to prepare for the possibility of negative interest rates, although the MPC has said it does not wish to signal that interest rates would go negative. Nevertheless, the option remains in “the toolbox”.
As such, many may wonder what negative interest rates could mean for their personal finances – from their mortgage to savings.
Matthew Fleming-Duffy, director of the Dorset-based independent mortgage broker, Cherry Mortgage & Finance, recently spoke to Express.co.uk on the matter.
“Negatives rates are definitely a possibility given the state the UK economy is in and challenges it faces,” he said.
“Increasingly, there are similarities with the economy of Japan, where interest rates have been around zero percent since the mid-1990s.
“Japan has dropped into negative territory from time-to-time and, while the effectiveness of this strategy is not well understood, it remains a tool that many believe can stimulate the economy.”
So, if interest rates did go negative, what could the impact be for those with mortgages?
“If the Bank of England drops the base rate into negative territory, it will almost certainly benefit individual mortgage accounts with existing tracker rates,” commented Mr Fleming-Duffy.
“However, newer products are more likely to have been priced higher relative to the Bank of England base rate.
“Thus, for more recent mortgages, the impact would be much less impactful.”
Could it mean lenders could potentially end up paying borrowers?
In theory, for those on certain mortgages such as trackers, this could happen.
However, Mr Fleming-Duffy explained that doesn’t mean it would occur in practice.
This could be because the lender may have put an interest rate floor in place.
“Theoretically, lenders could end up paying borrowers, but in practice you can guarantee that there is a clause in mortgage contractual terms that states this would not be possible,” he said.
The summary and minutes of the MPC’s meeting on February 3 addresses the committee’s decision on writing to banks regarding the potential for negative interest rates.
“While the Committee was clear that it did not wish to send any signal that it intended to set a negative Bank Rate at some point in the future, on balance, it concluded overall that it would be appropriate to start the preparations to provide the capability to do so if necessary in the future,” it said.
“The MPC therefore agreed to request that the PRA should engage with PRA-regulated firms to ensure they commence preparations in order to be ready to implement a negative Bank Rate at any point after six months.”
Earlier this month, the Bank of England Deputy Governor Dave Ramsden said the central bank did not currently think negative interest rates were needed.
Speaking to the Yorkshire Post, he said: We want to be in a position that if things didn’t get better as we are forecasting, if some of downside risks around new variants arose, that that tool of negative rates can be feasibly used if at the time we made the policy decision to use it.
“So we have asked banks on a contingency basis to do the preparations over the next six months so that tool is ready.
“But that is very different from thinking it will be used.”