Interest rates have been negative in Switzerland since January last year, when financial authorities pushed the Swiss equivalent of our Bank Rate below zero in an attempt to hold down the value of the franc.
That meant that commercial banks effectively pay to lodge cash, a cost which they want to pass on.
Local authorities are the sort of big customers likely to be hit with negative interest for maintaining hefty balances.
In the case of Zug, if taxpayers were to submit returns and payments ahead of time, the cost in interest would be £1.7m a year, the canton told The Financial Times.
It’s predicted that this year Swiss banks will start to apply negative interest rates to private savers’ accounts, too.
Could interest rates go negative here?
It’s a question that for much of last year, when Britain’s economic outlook was generally perceived to be positive, was not often asked. Instead the recurrent question was when interest rates would go up.
But now the world looks darker.
In the week in which analysts at RBS have urged investors to “sell everything” in the face of an apocalypse comparable with Lehman’s collapse in 2008, gloom is back in.
And what would happen if Bank Rate did go negative?
There would doubtless be many perverse outcomes similar to the Swiss tax authorities’ pleading for people not to pay their taxes.
More definite, though, would be the intensification of pain for savers who cannot risk their capital and depend for part of their income on returns from cash.
In a negative interest rate environment they would earn nothing or less than nothing on their savings. Their best bet – simply from a returns point of view – would be to stash notes under the bed.
If you tend towards this pessimistic view, you should consider locking into a fixed savings rate now. The receding prospect of a rise in Bank Rate suggests that fixed savings rates will shortly fall, even from their current lows.
Savings rates have fallen consistently: if the outlook were to deteriorate, and the markets to expect further intervention from the Bank of England, they would fall further
At the very least, you could consider raising the proportion of your total cash holdings that is tied up in fixed-rate accounts. That way you will be less exposed to falling variable rates.
In reality, though, the risk of low returns might not be your only concern if the gloomsters are proved right. If Britain were to move into negative interest rate territory, there would probably be widespread anxiety about the safety of all assets and institutions.
As Dutch bank ING said of periods of negative rates, when it pointed out that they had been toyed with during financial crises going as far back as into the 19th century: “The economic conditions are characterised by high risk, such that savers are less worried about the rate of return on their money than the return of their money full stop.”
How bad could it get? Could we end up having to forego our Premium Bond winnings, just to be sure that our original capital was safe?
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