Prepare yourself for negative interest rates

A few weeks ago, I told you that the best place for your spare cash was an NS&I account. I was wrong. I thought you’d be getting 1% with a Direct Saver account – but you won’t. You’ll be getting 0.15%. My apologies to anyone who (as I did) wasted their time signing up. The only consolation I can offer (it isn’t much) is that in the not-too-distant future you might think 0.15% not that bad. The Bank of England is currently looking at how to impose negative interest rates in the UK. The Bank’s chief economist Andy Haldane insists there is no plan to actually do so – this is just about having it in the “monetary policy handbook”. We hope he is right. A mere five years ago, the very idea that instead of being paid to keep cash in the bank, you should be charged for doing so, would have been viewed as nuts. Now it is commonplace. Central banks reckon that the lower interest rates go, the easier it is to generate inflation. If we have to pay to save, we’ll spend instead. And if we are paid to borrow, we’ll borrow lots and spend that too.

The problem is that it doesn’t seem to work. Super-low and negative rates are miserable for savers. They make them want to save more, not less, in order to end up with enough to finance their futures. Save £1,000 a year at a rate of -2% for 20 years and you’ll have £16,950 at the end. Need £20,000? You’ll have to save more like £1,200 a year, or a total of £24,000. Nuts.

They are miserable for defined benefit pension funds, who calculate how healthy their assets look relative to their liabilities, based on bond yields. The lower yields go, just like the savers mentioned above, the more cash they have to shovel in. Imagine how that translates into the behaviour of the pension fund’s sponsoring firm. If your obligations to previous employees’ retirement payments seem infinite, how can you prioritise wages for today’s staff or indeed, investing in your business? Negative rates are also miserable for bank margins (and distasteful as their behaviour often is, we do need healthy banks) and for anyone who cares about inequality (asset bubbles are an inevitable consequence of more-than-free money). They also have so far proven useless at creating inflation.

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Most people know intuitively that negative rates are wrong. Paper money has been around for about 1,000 years. No one, as far as we know, has ever offered negative nominal rates before. Given that and given what an awful policy tool they are (as shown by Japan and the eurozone) why the conversation in the UK now? It smacks of a classic example of “something-must-be-done-ism” – the act of introducing an obviously awful policy in a bid to be seen to be acting decisively, to solve a problem it may not be within your gift to solve (a bit perhaps like using endless lockdown to “eliminate” Covid).

Bad policy is a part of modern life. Negative nominal rates may or may not happen. Negative real rates (interest rates lower than inflation) are a given. If holding cash bears an actual cost, the opportunity cost of holding traditionally non-yielding assets disappears. So monitor the prices of art (even Banksy prices keep rising), brown furniture (it may finally be worth something), gold and silver. NS&I and the Bank of England might have let you down, but your grandmother’s tarnished teapot might be about to come into its own.