Could negative interest rates affect your business?
With global growth slowing and the impacts of the pandemic being felt across many economies, the Bank of England has begun having discussions around introducing negative interest rates in the UK. As the subject matter continues to pick up momentum, we discuss what business owners may need to consider to safeguard their business against the potential rate cuts.
What is the purpose of lowering interest rates?
Since the great recession, many advanced economies have experienced low growth and low levels of investment and inflation. In an attempt to boost growth, we’ve seen central banks taking on increasingly forceful monetary measures, which often include negative interest rates. The European Central Bank deployed negative rates in June 2014 and Japan did the same in 2016. Switzerland is currently the most negative with rates as low as minus 0.75%. So, negative interest rates are more common than you might think.While negative rates in the UK are by no means certain, they are certainly possible. Financial market futures and UK Gilts have been trading with negative yields in some maturities for some time. Setting the Base Rate is one method used by the Bank of England to implement monetary policy. Since the significant impact of COVID-19 on both the Global and the UK economy, central banks around the world have been working to stimulate economic activity in what was already a low-interest rate environment following weak growth post the 2008 financial crisis.
One of the COVID-19 specific dynamics are the plethora of loan programmes put in by Government to help business get through the crisis. Many of these programmes carry an initial period of zero interest and have been understandably well utilised. As of mid-October, CBILS, CIBILS and BBLS have a combined drawdown of £61.93bn according to Government data.
The objective of negative interest rates is to encourage the population to spend rather than save, thereby stimulating economic growth. Negative rates, however, go that step further, since in theory any savers with money in deposit accounts will see the value of their savings slowly decrease.
How will negative interest rates affect my business deposits?
A key source of income for any bank is Net Interest Margin (NIM). This is the difference between the interest rate it pays depositors for their savings vs. the interest rates it charges to make a loan.
In an environment where there is plenty of loan liquidity, particularly for SME’s, banks may end up carrying excess liquidity, or in other words, more cash than they can lend at reasonable charge. This excess is then placed with the Bank of England at the Base Rate. This has the effect of lowering the NIM they earn and, if the base rate is lower than the rate they paid depositors for the cash in the first place, can actually generate a negative return for the bank.
One mitigant for a bank is to reduce the rate it pays depositors for their savings, hence the rapid drop in savings rates we have witnessed since the early part of the year.
I barely get paid anything on my SME account anyway – why should I care?
A few reasons –
1. Business tend to have their accounts with the biggest banks in the UK – these banks often carry the most excess cash as they have the most customers. Banks have been known to ask firms with large deposits to withdraw the funds and place them elsewhere.
2. If the Base Rate becomes negative and the Bank of England start charging banks for those excess deposits, the banks will need to recoup that cost by potentially passing that cost forward to account holders. This might mean paying savers back less that they originally deposited. Alternatively, banks may increase fees of banking services such as payments, statements, and account maintenance.
3. There are plenty of SME deposit accounts in the market that pay interest. At time of writing, there are banks paying 0.5% in Easy access and as much as 1% for 1-year term all covered by FSCS protection*.
How Cash Management platforms can protect businesses against negative impact rates
As any business owner knows, it is important to evaluate financial risk to your company. The continuous management of cash deposits and constant review of the bank interest rates to ensure that the cash is always making the most of the better banking rates available is vital for businesses. Yet, the hassle involved in opening one new account, let alone multiple accounts, is often too time consuming and brings administrative burdens. An efficient solution to these problems is provided by cash solutions platforms such as ourselves. At Insignis, we provide secure, online access to dozens of banks and products all with just a single account opening procedure, helping to decrease the potential effects of negative interest rates and inflation. This in turn enables you to make the most of the highest interest rates that are currently on offer.
Find out more
The Insignis award-winning UK platform is designed for individuals, companies, charities, and local authorities to earn better interest from their hard-earned cash. Find out more by sending an email or giving us a phone call.
The figures used in this article were correct as of 17th November 2020.*
Originally published in the PIMFA Winter Journal 2020.