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The topsy-turvy world of negative interest rates

The Bank of England’s base rate is at its lowest level since the bank was established in 1694. Now, the Governor of the Bank of England, Andrew Bailey, has refused to rule out the base rate falling below zero.

It may appear to be perversely counter-intuitive, but when interest rates turn negative borrowers are credited interest instead of being charged it. Conversely, there may be a charge to cash deposits.   Economic theory holds that low or negative interest rates will stimulate consumer spending and incentivise borrowing, although sub-zero rates have seen mixed results in practice. 

Negative interest rates are already the norm in some nations. They have been introduced in Japan, the Eurozone, Switzerland and Sweden. Typically in countries with sub-zero interest rates commercial banks have only passed the cost on to institutional investors.  However, high-net worth retail investors holding cash may find themselves out of pocket too. 

In Switzerland, for example, UBS and Credit Suisse impose negative rates on deposits of more than CHF 2 million. Unsurprisingly, instead of paying up to 0.75% on their fortunes, many wealthy Swiss families have resorted to storing their cash in safe deposit boxes as it is less costly than the deposit charge. 

Gold has in the past been a safe-haven from negative interest rates, and nowadays even crytocurrencies are added to the mix of cash alternatives.

High-net-worth individuals, family offices, and other investors who rely on liquidity for their investments should be paying close attention to the Old Lady of Threadneedle Street.

Negative rates are an indicator of deep economic troubles, and bring harmful side effects for pension funds and other investors, banks and insurers. Cutting policy rates below zero should remain, in extremis, part of the central bank toolkit. But a move into negative territory should not be cheered.

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