You may have read in the press recently about Negative Interest Rates, which requires the Bank of England to charge a rate of interest to hold a cash deposit. Concerns are circulating that our high street banks will charge the public to leave our money with them, however, that is an incredibly unlikely scenario.
Negative Interest Rates would only apply to large institutions that require the security of substantial sums deposited with the Bank of England such as high street banks and larger PLC Companies. UK banks are required to lodge surplus capital with the Bank of England and are normally paid a rate of interest for doing so. Negative interest rates would require the banks to pay the Bank of England a rate of interest on their money.
The idea behind this move is to encourage the Banks to lend the money out to businesses and charge a modest rate of interest, rather than sitting on piles of cash that will cost them the interest charged by the Bank of England. This is designed to speed up the money supply, prompting investment and growth so aiding our economy.
Negative Interest Rates are not designed to be borne by consumers like you and me because if we thought we were going to be charged to keep our money in the bank, we would simply withdraw all our savings and stuff them under the proverbial mattress. As we know from the Northern Rock saga of 13 years ago, banks do not have enough liquidity to pay out all our cash deposits, so they would fold pretty quickly if that happened. The Bank of England does not want to promote a run on the banks!
Mind you, with the typical bank deposit account paying around 0.01% in interest, we are already in negative interest rate territory when you factor in inflation. Consequently, we are likely to see better growth potential from real assets such as Equities and Bonds over the next few years but we are unlikely to be charged to hold our money with our bank.
15th February 2022
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