Bank of England Chief Economist Clarifies The Bank's Position On Negative Interest Rates

Andy Haldane, the Bank of England's Chief Economist, was quick to put recent speculation about the prospect of a negative base rate into context, saying, “To be clear, reviewing and doing are different things and currently we are in the review phase and have not reached a view remotely yet on the doing.”

The Bank of England's Monetary Policy Committee (MPC) will meet on Thursday 18th June to set the central bank’s base rate, which since March has been at an historic low of 0.1%.

The Bank’s rationale for lowering the rate to this level was to “reduce the cost and to improve the availability of finance” to “support business and consumer confidence at a difficult time”, but with the country having been in lockdown and the resultant economic impact of this period of inactivity still unclear, the Governor of the Bank of England Andrew Bailey, when pressed by Parliament’s Treasury Committee on the possibility of base rates moving into negative territory said “We do not rule things out as a matter of principle, that would be, I think, a foolish thing to do.”

Andy Haldane, the Bank’s Chief Economist, was quick to put the Governor’s remark into context, given the speculation it fuelled, saying, “To be clear, reviewing and doing are different things and currently we are in the review phase and have not reached a view remotely yet on the doing.”

Use of negative rates in Switzerland, Sweden, Denmark, the Eurozone and Japan to date has resulted in excessively low inflation and even deflation, and in none of these economies has the policy been shown with any degree of confidence to have reversed the conditions that prompted it. Interviewed in the FT, Gero Jung, chief economist at Mirabaud, the Geneva-based banking and wealth management group, observed that negative interest rates in Switzerland have not resulted in clients reducing their savings and spending more, as policymakers had intended. “In fact, the opposite has happened, as people tend to have a savings goal, and if they are earning nothing in interest, they increase the amount of cash they put into savings accounts. This reduces the amount of spending in the economy, and so growth and inflation remain low.”

In the event that a negative base rate is set by the Bank of England in the coming months however, meaning that the central bank was in effect charging retail banks to deposit money with it, this could result in UK banks passing on that cost to their retail depositors, resulting in further reductions in retail deposit rates.

You may have clients who are already being impacted by falling returns on their savings, are anxious about the prospect of further rate reductions and want the assurance that their deposits are protected by the Financial Services Compensation Scheme (FSCS) to the fullest extent possible. If so, being able to offer them solution which not only provides that peace of mind, but also retains your visibility of the asset and your ability to continue to provide holistic advice encompassing it, has never been more important.

Flagstone’s cash deposit platform not only enables your clients to maximise the interest they earn during these challenging times, but just as importantly empowers them to manage their risk exposure and increase their FSCS protection through diversification.

Flagstone continues to work with our 45 partner banks to secure the best available rates for our clients, irrespective of base rate movements, ensuring that they can easily access hundreds of FSCS protected accounts providing market-leading returns.

For more information, please contact us at BusinessDevelopment@FlagstoneIM.com

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