Negative interest rates

Today, government bond yields and bank deposit rates sit very substantially – and uncomfortably – below where they were 5 and 10 years ago, in negative after-inflation terms and more-or-less-zero before inflation terms.

In March this year, the UK Government issued its first negative-yielding gilt borrowing £3.8 billion at -0.003% for a 3-year maturity. In other words, they are getting paid to borrow money by investors! What a strange world we live in today.

In other words, they are getting paid to borrow money by investors! What a strange world we live in today.

On a retail basis, falling yields are evidenced in the NS&I products on offer from the UK government. The days of Index-linked certificates at RPI + 1%, seem like Nirvana. The recent slashing of rates across the board on NS&I products leaves savers struggling to cover the erosion of their cash by inflation.

The Bank of England – alongside other central banks – has hinted that negative interest rates remain in its arsenal of tools to help the economy. Denmark has already seen home loan offers at a negative interest rate, meaning that mortgage borrowers pay back less than they borrow! One can perhaps see why the ‘Old Lady’ sees this as a useful stimulant in helping firms and consumers to have the confidence to borrow. However, if commercial banks are charged for placing deposits with the Bank of England then, in all likelihood, they will pass these costs onto retail depositors.

In effect, negative interest rates represent a transfer from savers to borrowers. However, there would appear to be limitations to negative rates as banks and individuals might well decide to hold bank notes instead at no cost if negative interest rates persist.

One possible solution is to run a system of dual interest rates. Specifically, this could be targeted at one rate for bank lending (e.g. -1%) and one for bank deposits (e.g. +0.5%). Various terms and conditions could be applied, such as directing the type of lending the banks could do with this facility. It has even been suggested that this could be used to drive a new ‘green deal’ where money would be available to companies focused on sustainability. Borrowers’ net income would rise, as would the benefits of greater economic stimulus through lending to companies to invest in projects. At the very least, this is an interesting concept.

The one thing that is certain is that it will be extremely hard to preserve the purchasing power of cash in the coming months and possibly years. Having enough cash to meet emergency liquidity needs is important, but make sure that any longer longer-term assets are sensibly invested.


About the Author

Jon is a highly qualified and experienced Chartered Financial Planner and Certified Financial Planner with over 27 years’ experience. He loves working with clients who are passionate about getting the most out of life and feels his job is to support them living life to the fullest. Read more from Jonathan...
This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.
Dom, your expert advice and management of our modest resources has made our retirement more comfortable than we ever imagined it would be. D & Y P (Suffolk)

Expert Opinion…

5 staycation destinations for an early break in 2021

Jonathan, December 11th, 2020

With the four nations split in their response to the coronavirus pandemic, different tier systems, lockdowns, and local restrictions could apply across the UK at the start of the new year. But with vaccine rollouts starting and the potential for more areas to come out of the higher tiers as the overall […]

Read More
Your guide to the art of perfect sleep

Dominic, December 11th, 2020

Sleep plays an important role in our physical and mental health. A good night’s rest can heal and repair our bodies and consolidate memories. Prolonged bad sleep, on the other hand, is linked to high blood pressure and problems such as anxiety and depression. A good night’s sleep is crucial but not […]

Read More
5 tips for a better work-life balance as a business owner

Dominic, December 11th, 2020

Striking a positive work-life balance as a business owner has been difficult this year, but it is vital for physical and mental health. Here are five tips to help.

Read More
T: 01993 772467      E:

Expert Wealth Management, West Wing, The Old Dairy, High Cogges Farm, Witney, Oxfordshire, OX29 6UN

Your Protection: In the unlikely event of your ever having a complaint which we have not been able to resolve amicably, you have recourse to the Financial Ombudsman Service (FOS). This is an independent body which will investigate complaints at no cost to you.  The FOS website is

Join The Expert Wealth Family As A Paraplanner >