To ask about ‘negative’ interest rates?

[Pottedpalm]

I just don’t get it; surely if the interest rate is negative, no-one will invest? I must be missing something..

Technically your ISA will probably be offering negative interest rates because they are paying less than the the rate of inflation. So if you have money saved with any bank, even an isa, you are effectively losing money.

The problem is this, what do you do with your money? keep it at home under the mattress? You just have to try and look for ways to maximise your return ensuring you are taking full advantages of any tax incentives eg paying into your pension, a lisa etc

@TimeToParty

Large investors like pension schemes and life insurers would remain invested in government bonds (gilts) even if the yield on them is negative because they use them to match their liabilities due eg regular pension payments or lump sums on death.

They aren’t so fussed about getting good returns off them. They might hold other investments like equities to gain additional returns.

Thank you. It was a warning from a pension fund which prompted my question.

Banks have been charging corporate customers to hold Euros for a while now (1-2 yrs). The point is to encourage corporations to invest rather than hoard cash. I don't believe it's applied to individuals yet.

Negative rates took me ages to get my head around, but have been implemented successfully in europe for a while now.

Interest normally compensates for several things (credit risk, time your money is tied up for etc). So even if base rate was negative you would still be likely to earn a return (all be it small) on fixed rate savings and mortgages would still cost you money.

In practice many banks are already charging you money to have a current account by offering "premium accounts" that include things like travel insurance. Business accounts also tend to charge for transactions. It is likely more banks would go down this route rather than actually have a negative interest rate.

Theoretically if rates went very negative people could still choose to keep their money in a bank as it's easier and cheaper than storing it safely at home (i.e. they get their debit card etc). Banks would make the same decision. They would have people's money and they would need to keep it safe. They either do this by (for example) putting gold bars in locked safes (expensive) or lend it to others as mortgages to be repaid in small chunks and pay the mortgagee for taking the money off their hands.

Other factors influence decisions as well. For example, if inflation is negative, £1 would be worth less in year than it is now. So lending £1 as a mortgage to be repaid with zero interest in a year would be a good business decision.

Interest rates drive spending, not investment. If interest rates are low or negative, people will be disincentivized from saving and be encouraged to spend, or indeed to invest. Low interest rates are a way to prevent deflation - where things cost less in the future than they do now. If people believed that stuff I’ll be cheaper in the future, they will sit on cash, thereby bringing the consumer economy to a halt. It also discourages businesses from investing in automation and infrastructure thereby limiting productivity.
The worst manifestation of this is stagflation, what we saw after the 2008 financial crisis. This is why central banks have been printing money since 2008 to keep deflation at bay. How do we get out of it. Higher consumer confidence, high productivity, and steep wage inflation. But there are always two sides to a coin. Everything that keeps deflation at bay leads to higher unemployment. The record employment figures of the last decade or so have been a direct result of low interest rates, low productivity and low inflation. At least in the UK.

The money program on radio four dealt with that today. Have a listen on BBC Sounds.

It's one of the reasons why it's harder for first time buyers to save for a deposit.

It's a ticking time bomb policy. Worsens the housing crisis AND, as pp have said, acts as a disincentive to save. Including pensions. So in future years we'll have large numbers of pensioners in need of housing and subsistence benefits. No home of their own, no or insufficient pension.

@Tealightsandd

It's one of the reasons why it's harder for first time buyers to save for a deposit.

It's a ticking time bomb policy. Worsens the housing crisis AND, as pp have said, acts as a disincentive to save. Including pensions. So in future years we'll have large numbers of pensioners in need of housing and subsistence benefits. No home of their own, no or insufficient pension.

That point about pensions is not true. If your pension is invested in US based funds, for example, then you are doing great. There has never been a better time to save in a pension fund trading on US markets. The problem is with the weak state of UK leading companies due to their dinosaur like exposure to dying industries. Again saving for a house deposit is the same. If you want to save in a run of the mill easy access account, then bad idea. Look at more creative ways of investing, and people have done very well. Low interest rates do indeed drive up asset prices like houses as people can get a better return owing property. But it boils down to this - at times of low interest interest rates, do not save, rather invest.

I'm not thinking about myself. I've been brought up to save and invest. I do think the low interest rates put other people off saving and that includes pensions. The government aim is to encourage spending rather than saving. That's all some (most?) people will do. It's already the case. They see the low or negative interest rates and see saving as pointless particularly if money's tight. As for the house prices? The housing crisis isn't going to go away. It's getting worse. It can't be ignored forever. People spending most of their income on rents don't have money to save for pensions.

I do think the low interest rates put other people off saving and that includes pensions.

If people are put off saving into pensions due to low interest rates, that shows a lack of financial literacy.

sst1234 is correct about investing not saving. Equities have done amazingly well over the last 10 years despite low interest rates.

Yes please don’t be put off saving into a pension if you can afford to!

You aren’t taxed on the contributions, your employer will be contributing for you too, and if you’re in a DC scheme you may well be invested in the equity market, which has done well. Plus it’s a long game, who knows what the market will look like in 20-30 years.

If you’re in a final salary/DB scheme then your employer takes on all the market risk anyway so to leave the scheme would be a very poor idea for most people.

A lot of people can't afford to save anything for a pension when they're struggling with high rents. Negative or very low interest rates to prop up the house price bubble is making matters worse. As is the stamp duty holiday.