It’s time for British savers and investors to watch out.
The Bank of England, the U.K.’s central bank, is now testing the waters for possible negative interest rates.
If that happens, it would be a financial war on hardworking savers in Britain and at the same time likely hurt the economy.
How it could is as follows. If interest rates fell to minus 0.5% a year and you put £1,000 in the bank at the beginning of the year, you’d get back only £995 back at the end of the 12 months. In other words, your bank balance would shrink, and the bank would keep the difference.
Remember, these are the same banks that only survived because of the hundreds of billions of pounds of British taxpayer money that got provided to save the broken banks that made dodgy loans in the years preceding the financial crisis of 2007-2009.
In other words, shrinking savings accounts would be the thanks that taxpayers get from the banks.
Why Even Consider Nutty Negative Interest Rates?
Why is the B0E even considering such a nutty move? The idea would seem to be to stimulate the economy, which is clearly suffering under the COVID-19 pandemic. At least that’s the theory. But in practice where this policy has been tried, it has failed miserably and made the economy worse than it would otherwise have been.
The case in point is Sweden, which I wrote about at the beginning of 2019 after reading a deeply researched working paper on the topic. What the researchers found was that the effect of negative interest rates on the economy was harmful. Put simply, if the Riksbank, Sweden’s central bank, had left interest rates alone, the economy would have done better than it actually did with negative interest rates, according to the analysis in the paper.
At least part of the problem was that when interest rates turned negative in Sweden the banks the cost of borrowing increased instead of falling and the economy was hurt. Neither outcome is ever good for an economy that needs a boost.
If Britain follows in the footsteps of such folly, expect the policy to further wreck a damaged economy and hurt savers. What’s more, investors would likely suffer also.