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  • Writer's pictureInvestment Synergy Team

Are you ready for negative interest rates and charges for current accounts ?

Updated: Mar 2, 2021

Where will you put your hard earned cash? ..... not under the bed we hope !.

“Negative interest rates would cost Britain’s five biggest banks £1 .billion a year in lost profits, a leading analyst has warned.

A quarter point cut in interest rates to -0.15 per cent would knock up to 11 per cent off their annual profits even with offsetting measures similar to those used in the eurozone, Raul Sinha, banks analyst at JP Morgan Cazenove, has estimated.

NatWest Group, which is 62 per cent-owned by the taxpayer, would be hardest hit, followed by Virgin Money and Lloyds Banking Group. Barclays and HSBC UK would be least affected, Mr Sinha said.

The Bank of England last year launched a review into whether high street lenders are operationally ready for negative rates as it sought to add another weapon to its depleted monetary policy arsenal.

Speaking to The Times, Sir Paul Tucker, the Bank’s former deputy governor for financial stability, said the review into operational capability missed the point.

“It is a debate that doesn’t seem to debate the big thing,” Sir Paul said. “If this is about -0.5 per cent it’s not that important a debate for the strategic fiscal and monetary [policy] mix. If it is about -3 or -4 per cent it’s a massively important debate.”

The Bank is not looking at lowering rates deep into negative territory, but whether it could mimic the eurozone, Sweden or Denmark by cutting rates to around -0.5 per cent. The UK policy rate is currently 0.1 per cent. Deep negative rates would require fundamental behavioural changes to work.

Negative rates hammer bank profits by imposing a charge on deposits held at the central bank that they are unable to pass on to household savers and struggle to pass onto business customers.

The European Central Bank has introduced a tiering system to offset some of those profit pressures in the eurozone but Mr Sinha said the deposit accounts of UK banks are so large that a -0.15 per cent rate “would cost the top five UK banks circa £1 billion in annual profits” even with an ECB-style tiering offset.

Amanda Murphy, head of UK commercial banking at HSBC, told MPs last month that negative rates would impose a “considerable” cost.

She said: “We may see some very peculiar behaviours such as people hoarding cash or keeping large sums of cash in their homes. There are, as you would imagine, a number of potential consequences here that we should be aware of.

One senior bank executive said investors do not value them against counterfactuals and they would have little option but to start charging fees on current accounts, effectively ending the era of free banking for those in credit.”

Investment Synergy - Isn't it time to consider safe and secure alternative investments?


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