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Negative interest rate fears despite BoE restraint

4 February 2021

While the Bank of England avoided negative interest rates in its announcement on 4 February 2021, a large proportion of investors remain concerned about the prospect of negative interest rates a survey by HYCM has shown.

According to research by HYCM, amidst growing speculation that the Bank of England may use negative rates as part of its monetary policy to help the economy recover from Covid-19, 64% of investors expressed concern about the prospect of negative interest rates being introduced in 2021, but over half (55%) have little understanding of how negative interest rates would affect their financial portfolios.

The Bank of England has been gathering evidence from banks as to whether negative interest rates could work in the UK and examining how the policy has been used in other countries.

Since the pandemic began, the Bank has cut rates from 0.75% to 0.1% and almost doubled quantitative easing to £895 billion – equivalent to over 40% of annual UK GDP.

Giles Coghlan, chief currency analyst, HYCM, said: “More clarity is needed as to whether the Bank of England will need to use negative interest rates, especially now there has been a positive Brexit deal for the UK at the start of 2021. For now, we know that Governor Andrew Bailey wants negative interest rates to remain part of the Bank’s ‘tool kit’. Whether they will be deployed is another matter.”

HYCM said that despite the turbulence witnessed over the past 12 months, half (50%) of investors are optimistic that the financial markets will fully recover this year from the disruption caused by Covid-19. However, over half (54%) are making short-term financial decisions due to the market uncertainty.

Coghlan added: “Should investors be worried? My short answer is no. Yes, negative rates could affect rates linked to mortgages, credit cards and personal loans. However, retail investors should not expect to pay interest on the cash they are holding in bank savings accounts as this has not happened in Switzerland which currently has negative interest rates.

“I’m more interested to see how the pound and FTSE could react to such an announcement and whether this might lead to new investment opportunities. Certainly, a walking back from the use of negative interest rates creates opportunities for short term GBP strength at the very least.”

Professional Paraplanner