0% interest rate - possible?

Renfro

I've read a few reports online that say a fall in interest rates to zero percent is not completely out of the question, and I just wondered what that would mean for savings accounts?

http://www.thisismoney.co.uk/saving-and-banking/article.html?in_article_id=456296&in_page_id=7

With rates on savings accounts already well below the rate of inflation, how would these products even be able to call themselves savings accounts any more?

Maybe they should rename them "Losings Accounts" :rotfl:

As I've never witnessed such a scenario before, I can't even imagine how this would pan out in reality. Any ideas?

Reaper

I think it unlikely, and even if it did that does not mean savers would earn 0%. Banks are still desperate for cash and the only way to attact it is good savings rates. I would expect savers to get about 1.5-2% if interest rates were 0% - made possible by Libor rates staying well above the base rate.

If the rates savers could get dropped significantly below inflation I would expect to see people placing their money with foreign banks offering better rates. Since the government doesn't want that to happen rates wold only ever get that low if the rest of the world was doing the same.

GooeyBlob

Even if savings rates stay at 1.5% - 2%, you still have to factor inflation into the equation. I don't believe we're out of the woods on that score, and RPI could stay well above rates that are available to savers.

I guess it depends what you're saving for. If you're intending to purchase property when the market has bottomed out, then 0% isn't actually a bad rate, because house prices look likely to go down for at least a year or two, and probably a bit longer than that.

It's not all doom and gloom though as not everybody thinks rates need to go down. This morning I spotted a very interesting article by Liam Halligan in the Telegraph:

http://www.telegraph.co.uk/finance/comment/liamhalligan/3408029/The-day-the-Bank-of-England-cut-interest-rates-to-3pc-is-the-day-it-lost-its-marbles.html

eeja

GooeyBlob wrote: »

Even if savings rates stay at 1.5% - 2%, you still have to factor inflation into the equation. I don't believe we're out of the woods on that score, and RPI could stay well above rates that are available to savers.

I guess it depends what you're saving for. If you're intending to purchase property when the market has bottomed out, then 0% isn't actually a bad rate, because house prices look likely to go down for at least a year or two, and probably a bit longer than that.

It's not all doom and gloom though as not everybody thinks rates need to go down. This morning I spotted a very interesting article by Liam Halligan in the Telegraph:

http://www.telegraph.co.uk/finance/comment/liamhalligan/3408029/The-day-the-Bank-of-England-cut-interest-rates-to-3pc-is-the-day-it-lost-its-marbles.html

Interest just down to zero....don't bet on it. In the 70's the Swiss had a negative interest rate ! Yes...you had to pay negative interest on all bank deposits...The Gov in UK would do it for another reason....to ensure people spend to get the economy going again
I remember it well. It did the trick wonderfully stopping a lot of 'hot money' being put into Swiss banks.
ps...yes great article by Liam Halligan in the Telegraph...read it .

halight

Hi just to say i think the same as the others

All the best

iltisman

I reckon all of us who live off our savings income just go into fiscal hibernation until
rates rise again.

nilrem_2

iltisman wrote: »

I reckon all of us who live off our savings income just go into fiscal hibernation until
rates rise again.

Oh that we could! :eek:

cos69

Surely ZERO or 1 to 2% interest rates mean we can borrow money very cheaply to spend and stoke up inflation; is counter productive. Also attracts "carry trade" to borrow UK money and gamble with in countries where interest rates are higher.

On the other hand if it helps the governments election prospects, then we will get zero interest rates

nilrem_2

cos69 wrote: »

Surely ZERO or 1 to 2% interest rates mean we can borrow money very cheaply to spend and stoke up inflation; is counter productive. Also attracts "carry trade" to borrow UK money and gamble with in countries where interest rates are higher.

On the other hand if it helps the governments election prospects, then we will get zero interest rates

I think it was a bad move myself, it hits a lot of older people who depend on savings, there are a lot of them and they will spend less.

IMHO it would have been better to have knocked off say 0.50% this time and have some in reserve to use later on rather than giving a lot off in one go.

Blah99

eeja wrote: »

Interest just down to zero....don't bet on it. In the 70's the Swiss had a negative interest rate ! Yes...you had to pay negative interest on all bank deposits...The Gov in UK would do it for another reason....to ensure people spend to get the economy going again
I remember it well. It did the trick wonderfully stopping a lot of 'hot money' being put into Swiss banks.
ps...yes great article by Liam Halligan in the Telegraph...read it .

No, no, no. You're perpetuating disinformation. The negative interest rates were only applied to non-Swiss residents who were holding large amounts of francs. They were speculating on the currency and the Swiss government levied the negative interest as a charge. People were happy to pay it because they expected to make significant returns as their currency appreciated.

The idea of a negative interest is an economic trick mainly used by banks to reduce their exposure to "home" currency (see the Japan example).

gvlewis

cos69 wrote: »

Surely ZERO or 1 to 2% interest rates mean we can borrow money very cheaply to spend and stoke up inflation; is counter productive. Also attracts "carry trade" to borrow UK money and gamble with in countries where interest rates are higher.

On the other hand if it helps the governments election prospects, then we will get zero interest rates

If the Government decides to finance a round of tax cuts through borrowing this will also be inflationary. Nobody will want to invest in a country with a high level of debt (Govt and personal) so investors will withdraw from the Pound and invest in other currencies. A sinking pound increases inflation in an economy as external goods become more expensive.

If you look at the countries that had low/negative inflation - Switzerland and Japan - they both at the time had strong currencies.