The possibility of negative interest rates has been very much in the news since the Bank of England (BoE) questioned banks about how they would deal with negative rates if implemented.
So, what would negative interest rates actually mean for savers? Whether cash is held in an ISA, in a savings account, or in a primary bank account, negative rates will affect everyone essentially ‘holding cash’, but there are ways to mitigate a potential hit to one’s savings by diversifying risk.
Multiple studies have shown that the uncertainty surrounding Covid-19 has meant that millions of people have either started saving, or have saved more throughout the first lockdown due to a combination of ‘forced savings’ and financial caution.
Now more than ever, savings decisions need to be made in a proactive, cost-effective way. So what should individual savers, IFAs and financial advisors know about what negative rates really mean in practice?
What is the reasoning behind the Bank of England’s decision to set a negative base rate?
The Bank of England’s base rate of interest, which influences how cheaply banks can borrow money, and how much consumers earn on their savings, was again held at a historic low of 0.1 per cent in November. However, rumblings of a negative base rate have been going on for a while, with these whispers becoming louder and louder in recent months due to the BoE’s precautionary conversations with UK banks.
Although the economy had started to heal (albeit slowly) in September, and with the furlough scheme set to continue throughout most of 2020, these economic boosters may not be enough to deter the Bank of England’s decision to implement a negative base rate in the future. It is hoped that if implemented this will encourage banks to lend more, and hold less money, and in theory, attempt to counter the huge drop in economic growth this year.
How will negative base rates impact savers?
Negative rates will mean that the banks will be charged for holding cash deposits by the Bank of England, and will most likely try to pass on those costs to their customers holding savings in their accounts.
Recently there were protests from HSBC customers when they were told that they will have to start paying to hold money in their bank account. HSBC has already retracted this earlier statement due to the level of negative feedback.
Although many in the industry say that the practice of charging for current accounts is well-overdue, and more in line with what many countries such as the US already do, it will not sit well with UK consumers who have always had the option to hold their money in a bank account for free. However, banks will need to make up losses through the products they offer, and it may be the consumer who will be paying for it.
Furthermore, it is likely that those who already hold premium accounts and pay for their banking services will see little value in the interest they are making, and over time consumers holding cash in banks will see their money lose value in the long run if inflation rises.
Is the UK alone in dealing with the possibility of a negative base rate right now?
Countries who have, and who are discussing the implementation of negative rates have rekindled the old debate around whether negative rates do more harm than good to the economy.
Central banks in Denmark, Japan, Sweden and Switzerland are all experimenting with negative interest rates - essentially making banks pay to park their excess cash at the central bank. Furthermore, according to the Financial Times, there is early evidence from parts of Europe, where they already have negative rates, that only the wealthiest are paying banks reverse interest on cash balances worth hundreds of thousands of Euros or Swiss Francs.
The financial landscape for UK consumers
As we have mentioned, a significant amount of people in the UK are saving more money now than they did in previous years, and there are very few obvious options for less-sophisticated savers and investors who want to see a modest return on their cash no matter how big or small.
Although the UK economy has gone into freefall since the first Covid-19 lockdown earlier this year, with only a slight uptick in economic recovery around September, it is likely that the economy will stabilise and grow long-term, but for with the continuing uncertainty surrounding the pandemic, a second lockdown as well as the possibility of a No-deal Brexit it is more important than ever for savers to diversify their risk whilst trying to maximise the interest they can earn.
The Akoni Cash Management Platform – help your clients diversify risk, achieve better returns and save time
With NS&I slashing rates to 0.01%, and Octopus cash closing their offerings to the financial advisor market, there has never been a better time to sign up for a platform that will increase a customer’s returns on cash, and allow you to make timely, market-driven decisions to help you best place money throughout these turbulent times.
So, why Akoni?
1) Diversifying risk (spreading money across various savings providers)
With the option to spread cash across several providers on the Akoni Cash Management Platform, you can diversify risk, and increase the chances of positive returns.
2) Better interest rates
In a climate of economic uncertainty and with interest rates being cut across many providers, it’s not easy to find decent interest rates in a simple way. With Akoni, you can find competitive interest rates to suit specific needs.
3) Quicker, and hassle-free
Akoni Hub provides a hassle-free cash management experience. Clients will only need to complete one AML/KYC process, and can switch between providers, and manage their account on the Akoni Cash Management Platform in a just a few clicks.
The award-winning Akoni Cash Management Platform is already leading the way in the wealth management sector, and has partnerships with Barclays, Aldermore, Metro Bank and others. The ability to white label the platform gives IFAs and financial advisors flexibility to help their clients move cash depending on ever-changing macro and micro environmental factors.
Although the pandemic has brought the country to its knees economically, it has shown that the savings market is ripe for innovation, and through technology, IFAs and financial advisors can help their customers can get the most out of their hard-earned cash with management tools such as the Akoni Cash Management Platform.
Find out more about Akoni: Akoni is an award-winning UK cash platform, which provides a marketplace to IFAs, financial advisors and wealth managers through a bespoke white-label offering, or off-the-shelf offering. Akoni uses innovative technology to personalise cash planning solutions for clients, and also provides a full API solution to banks and insurance clients.
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