negative rates

Are Negative Interest Rates A Good Or Bad Idea?

Interest rates in the UK & US have been at record lows ever since the financial crisis gathered pace back in 2009. It came out yesterday that some members of the Bank of England are actually suggesting that negative interest rates should be considered in an attempt to boost the economy. Although the mouths of many people on tracker mortgages may be salivating at the thought, would negative interest rates really help the economy or would the potential negative consequences be too great?

In theory negative interest rates sound like a good idea. The theory is that central banks would actually be charging banks to hold their money so this might encourage banks to lend more. It may also provide a boost to the economy by giving mortgage borrowers on a base rate tracker mortgage another cut to their monthly mortgage payment. In reality though, there could be many short term and long term negative effects if interest rates were to head into negative territory.

A Kick In The Teeth For Savers

Although many mortgage borrowers have benefited greatly from low interest rates, savers have seen returns on their investments fall drastically and it’s not as though they don’t need the money. Many people actually live off the income from interest on their savings and a further cut to these rates could have drastic consequences for some very vulnerable people.

Then we have the issue of moral hazard. When the Bank of England dropped rates to a record low of 0.5%, they actually rewarded people who had made some very poor financial decisions and borrowed far too much money on mortgages, credit cards and loans. When you consider that responsible savers were the ones to take the hit you have to ask, are we actually encouraging people to make poor financial decisions?

Finally, I’d find it interesting to see if the money that mortgage borrowers might save through a further rate cut would actually be offset by the money taken out of the pockets of savers, therefore having no positive effect on the economy. I’ll look out for some numbers on this and bring them to you if I find them.

Should Banks Be Lending More?

The other argument being put forward for negative interest rates is that it would encourage banks to lend out money rather than stash it all with the Bank of England, but should banks be lending more money right now?

For a long time now banks have been actively encouraged by governments to rebuild their balance sheets and keep more cash available in reserve. They’re also still feeling the financial effects of PPI mis-selling and other scandals. Don’t get me wrong I have absolutely no sympathy for the banks but is now the time for banks to go lending out money freely, only to wind up needing another bailout in a few years time?

Also isn’t the fact that most people borrowed too much money the reason we’re in this mess in the first place? Whether it’s banks, businesses, governments, consumers or even investors, many people borrowed too much money and there is still far too much debt in the system. Forcing banks to lend out more money might well exacerbate the problem.

Have We Become Too Dependant On Low Interest Rates?

If interest rates were to jump back up to 5 or 6 percent tomorrow, what would that do to your finances? For some this might be a scary thought but interest rates of around 5 or 6 percent are actually normal levels. The fact that many might find themselves financially crippled by a return to normal interest rate levels shows we may already have become too used to living with unnaturally low rates of interest. Dropping rates into negative territory would only make this low rate dependence worse.

What do you think? Would negative interest rates help or hurt you and do you think they’re a good idea?

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10 Responses to Are Negative Interest Rates A Good Or Bad Idea?

  1. We live in some interesting times. I personally don’t like the idea of negative rates as it penalizes those people who are responsible with their money and haven’t loaded up on debt.
    Glen @ Monster Piggy Bank recently posted..Make Sure You Shop Around for Credit CardsMy Profile

  2. As Glen said, these are definitely interesting times. I think the moral hazard issue is a very valid concern as it might only induce more to pile up the debt. If rates did shoot up it would not impact us personally that much as the only debt we have is our fixed mortgage.
    John S @ Frugal Rules recently posted..Taking the Plunge: Why I Hate Being Self-EmployedMy Profile

  3. Jose says:

    I think negative interest rates should mean that the credit card companies pay ME interest on the money I owe them. Wouldn’t that be a fun twist :D. Seriously though, I can’t imagine a worse idea than a negative interest rate from the perspective of how our banking system works. I’m actually having a hard time wrapping my head around how that would work in the U.S.
    Jose recently posted..Sequestration – Let it Come – Here’s WhyMy Profile

  4. I agree with Glen and I believe those that are good with their money will be penalized and it’s not right. Why is the people that mess up get the perks? I think some people will have the shock of their lives if interest rates go up especially the one’s who have a huge mortgage and lots of debt. Sometimes fixing a problem while creating another isn’t the best route.
    Canadian Budget Binder recently posted..Soft Or Hard Water-Is Your Water Softener Costing You Money?My Profile

  5. We’ve become too accustomed to low interest rates. It’s similar to when we had a “tax holiday” in the U.S. people became accustomed to larger paychecks for a few years. When tax rates went back up people suddenly said that they couldn’t survive. Yet, they did just fine before the holiday.
    Justin@TheFrugalPath recently posted..Profit From Your Passion: It’s not always possible.My Profile

    • Totally agree with you Justin, most people live to their means. If they have more money they’ll spend it and if they get used to having more money they’ll take on extra commitments.

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