0% interest rate is it possible!

iamesbo

nilrem wrote: »

Only until the capital runs out, up to now it has been possible with a decent sized sum to keep the capital from eroding by using the interest, with little or even zero interest the capital will soon start being eroded so that even if the rates pick up ones 'nest egg' is then too low.

It is all realtive realy, inflation is eroding savings so you have less each year in real terms
when you spend interest above the rate of inflation. In most cases there is little or
no interest above inflation, especially if it is taxed.

And if you take the current situation and had zero interest and were saving for a house (or deposit) you would actually be better off by 15% a year or more!!
In the last 10 years if you were saving for a deposit with say 5% interest you would
actually be worse off by about 5% each year as houses were increasing by 10%
per annum!! So after to years of 'saving' you would be able to afford less of a
house (or deposit) that you could get when you first started!!

You are only likely to get zero percent interest when prices are falling so your capital is increasing in real terms (purchasing power).

You have to remember the *real* rate of interest is the nominal rate minus inflations, not the rate the bank manager plucks out of his derriere :rotfl:

So many people already have 0% rates and indeed negative rates, my current acount currently pays me the princely sum of about -4% :j

Liloly

I have been looking at what mortgage rates are in USA and they seem to be around 6%.
People in some USA forums have been explaining that their mortgage rates are not linked directly to the key funds rate now 1%.
If you look around at Federal Reserve rates though, that 1% is just one rate, there is also another one called the Prime Rate which is 3% above (4% currently). This is described as the rate at which banks lend to one another.
Now that follows that if they cut to 0% that would then be 3%.
If you look at the European central bank website they have two rates on there, the 3.75% rate that we hear about and then another one called the marginal lending facility which is 4.25%.
If follows that at 4.5% our bank rate is very much in line with these other two rates which are never publicised. On the Bank of Englands website there is only the one interest rate that appears.
Now I may be totally ignorant and not fully aware of what these other interest rates mean so I would be very grateful if someone could explain why other central banks have multiple interest rates (some of which are never headlined and seem in line with BOE current rate) while we have only the one interest rate.

gozomark

US prime rate is not set by the Fed, but by the banks, and its what they charge good customers. Will be similar in all countries eg in the UK banks will charge their best customers a %age over base rate - its just not as explicit.

the right rates for comparison are
UK - 4.5%
EU - 3.75%
US - 1%

ixwood

All this is assuming that real interest rates follow offical ones, which they aren't/won't.

Banks still need cash so savings rates won't drop too far.

Liloly

The margin between UK base rate and fixed term savings bonds varies between 1.5 to 2.5% at the moment on anything up to three years. My own prediction is that if say UK base rate came down to 2.5% you could still get 4% on a fixed rate deal. Anything below 4% it wouldnt be worth your while tying money up for.
Its a different story for instant access as they are tied to base rate as opposed to money market rates and the trick used now is to offer a short term bonus of 1-2% for new account holders.
Of course low interest rates will not be permanent. I can see a day when they will once again be 15% when inflation takes off as it will do eventually.