Author Topic: Interest Rates  (Read 80 times)

eddieb

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Interest Rates
« on: February 04, 2021, 05:04:27 PM »
Hi.
One of my shares, Lloyds Bank, jumped today on news that the BoE has no plans to introduce negative interest rates. Negative interest rates would be a new phenomenon in the UK, so I thought I would do some research so that I could explain it, for anyone who is interested in that sort of thing.

How it works

Under a negative rate policy, banks and other financial institutions are required to pay interest for parking excess cash -- beyond what regulators say they must keep on hand for safety reasons -- securely with the central bank.

Avoiding the charges is an incentive for banks to use their money to lend more to businesses and consumers, helping growth.

The ECB introduced negative rates in 2014. Its deposit rate is currently -0.5%.

The Bank of Japan went negative in 2016, mostly to prevent a strengthening yen from hurting its export-heavy economy. The BOJ uses aggressive asset purchases to guide short-term rates to -0.1% and the long-term rate to about zero. In December, however, it said it planned to examine more effective ways to achieve its inflation target amid growing concern among policymakers over the diminishing return and rising cost of prolonged easing.

Pros and Cons

Negative central bank rates lower borrowing costs for businesses and households.

Advocates say they also help weaken a country's currency by making it a less attractive investment than other currencies. That can give exporters a competitive advantage but boosts inflation by pushing up import costs.

But negative rates also narrow the margin that financial institutions earn from lending -- something BoE officials have previously said could prove counter-productive, hurting banks and reducing the flows of credit to the economy.

The ECB and the BOJ have sought to reward banks that use their credit lines, recognising the need for incentives to boost lending rather than just punishing them for parking their money.

BoE Governor Bailey said in January that rates close to and below zero changed the "whole calculus of how the banking system works."

Lenders in Britain make most of their profits from the difference between the rates they charge for their lending and what they pay for deposits, and bankers said negative rates could force them to introduce more retail banking fees.

HSBC said in October that rock-bottom and sub-zero rates in countries where it operates meant it had to consider more charges. British lenders would probably charge large corporate depositors first and consumers as a last resort.

In Switzerland, big banks initially did not pass negative rates on to private and smaller corporate clients. But five years on, nearly all Swiss banks have passed on some charges to corporate and individual customers with large cash balances.

Higher banking fees could also limit how low negative rates could go -- depositors can avoid being charged negative rates or fees on their deposits by choosing to store banknotes instead.

Disclaimer. Posts are just my thoughts,  not recommendations.  Do your own due diligence before trading