Negative Interest Rates: What Do They Really Mean for Savers?

As the Bank of England continues to float the possibility of negative interest rates, savers will need to look for new opportunities for long-term gain.

John Ellmore, Director of NerdWallet, discusses the significance of negative interest rates and how savers can adapt to them.

Many Britons will have hoped that 2021 would provide some respite from the intense financial pressures of 2020. Unfortunately, this is unlikely to be the case – in fact, new and potentially unique challenges lie ahead.

COVID-19 has had a hugely significant impact on the UK economy: 314,000 redundancies were reported between July and September 2020 alone, Government spending rose by £280 billion last year, and public borrowing in the past 12 months is estimated to be the highest in peacetime history at 19% of GDP.

The Government and Bank of England (BoE) have had to act in order to stimulate the economy and limit the damage. For one, in March 2020 interest rates were cut to a historic low of 0.1%. However, the cut might not have gone far enough and, over recent months, the BoE has been debating lowering rates below zero; going as far as to issue a letter to all UK banks, urging preparedness for base rates to drop to negative figures.

This policy is not without its merits. After all, it will encourage commercial banks to lend more, and consumers to spend more, therefore fuelling economic growth. However, negative rates are unlikely to be viewed as optimistically by savers.

The impact of negative interest rates

While negative interest rates make borrowing cheaper, they have the opposite effect on savings.

When rates fall below zero, it becomes more expensive for commercial banks to keep customers’ money in savings accounts. Theoretically, this could force commercial banks to charge savers for holding their money. However, this scenario is not likely, as doing so would inevitably drive the majority of clients to rapidly withdraw their savings from banks. This would, in turn, cause a massive economic aftershock.

While negative interest rates make borrowing cheaper, they have the opposite effect on savings.

That said, even if commercial banks do not impose such fees, the value of many people’s savings could decrease over time; it certainly will in real terms, given the UK’s inflation rate currently sits above 0.5%.

The question, therefore, is what can savers do to protect their money?

Keep calm and research different options

Crucially, Britons must not panic. Doing so may result in rash or ill-informed decisions, which could damage their long-term financial prospects. Instead, it is important to dedicate time researching the various savings options available.

For more risk-averse savers, there are savings accounts available which still offer relatively generous interest rates. For example, there are fixed-rate savings accounts offering up to 1.25% in interest, while some instant access accounts can offer savers as much as 0.6%.

People most thoroughly research their various saving options. Comparison websites are a good starting point, as they search the market for different financial options and present their findings in a clear, jargon-free table. So, users can simply select the savings account that best suits their needs.

Consider investments 

However, some savers may want their money to work a bit harder. In which case, they might want to look into other options, such as stocks and shares ISAs.

These are tax-efficient investment accounts, which enable savers to put their money into a range of different investments – these can either be chosen by the saver themselves, or by the ISA provider.

Stocks and shares ISAs present an opportunity for generous returns on savings, should the investments be successful. However, this also means that the value of savings could decrease, if the value of investments falls. So, those contemplating starting a stocks and shares ISA should carefully consider their risk appetite before committing to this savings strategy.

Premium bonds accounts

Another alternative savings strategy comes in the form of a premium bonds account. This entails adults purchasing bonds for £1 each; £25 worth of bonds being the minimum amount one can purchase. Instead of gaining interest on their purchase, customers are entered into a monthly cash prize draw in which they could win a tax-free sum of between £25 and £1 million.

What’s more, 100% of an individual’s investment is protected, so investors will always break even, even if they never win a prize draw.

That said, the odds of savers winning money are not particularly encouraging; it is estimated that 1 in 54,656,068 people win £1,000 each month. So, while perhaps a more fun alternative to a traditional savings account, this strategy might not be suited to those looking to make more significant or predictable gains on the value of their savings.

The prospect of negative interest rates will be unnerving to many savers. However, it is important to remember that there are alternative savings routes available. Finding the right one will involve dedicating time to researching different options; but if Britons do their research and make informed decisions, they should be able to save for the future with confidence.

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