Negative interest rates are on their way, where should you now put your money?
Denmark, Sweden, Switzerland and Japan, some of the countries whose banks have introduced negative rates. Now it looks like the UK is also set to follow suit.
In order to try and bolster the economy and encourage spending the The Bank of England has said that they may introduce negative interest rates. But what does this now mean for savers?
This would be a first in the UK, and it rightly has many savers feeling uneasy about what to do next.
What are negative interest rates?
Negative interest rates simply mean that if you’re a saver, the bank (theoretically) will charge you to hold your cash. Conversely, borrowers will be credited interest rather than paying interest. More countries around the world are now starting to adopt negative interest rates due to the likelihood of an economic recession.
How did we end up here?
Even before Covid-19 interest rates had been declining for years. The following graph highlights the huge decline since the 1980s:
Interest rates around the world have gradually become lower and lower, however since 2009 the rates have become extremely low. The cuts to interest rates over the years has been due to monetary authorities trying to stimulate economic growth and prevent deflation through making it cheaper to borrow money.
However, we’ve now reached a point where many banks may begin to start charging customers to hold their money, rather than allowing them to generate interest on their savings. Although this benefits borrowers and investors, the ones who are hit hardest are savers. Any money now put into a savings account won’t see any decent returns for a very long time.
Why are banks considering negative interest rates?
There are a variety of reasons why banks are considering negative interest rates. The supposed rationale for this decision is:
- Cheap money for the banks.
When rates are low banks can provide customers with cheap credits.
- Spending is more attractive than saving.
Low interest rates encourage spending over saving. In theory, this will help support businesses and help kickstart the economy. Cheap rates on mortgages and loans will encourage more spending and allow more money to be pumped into the economy.
- Safeguard jobs.
Capital investments for companies will become more easily accessible due to cheaper credit.This allows companies to grow their sales, which in turn will not only support the economy, but also protect jobs.
Will negative interest rates have a positive or negative effect?
Although negative interest rates in theory should benefit an economy, through the ways listed above, there are issues that arise from negative interest rates.
The biggest issue with negative interest rates is that it encourages risky lending. Banks may start to loan more money to people who are unlikely to ever be able to pay back. If this occurs, we could see a repeat of the mid-2000s where many people were defaulting on loans due to a lack of income and assets.
Japan has had negative interest rates in place since 2016, they initially thought the policy would help solve its economic trouble, but in Japan, there are still no signs of growth and national debt still remains extremely high.
Then there’s of course the issue with your savings. When other central banks have brought in negative rates, banks have tried to avoid introducing fees for savings accounts, as they don’t want everyone to start withdrawing their cash. Instead the banks will try to compensate for these losses by recovering their fees from elsewhere, through making certain services more expensive.
What are the alternatives?
Although small savers are unlikely to be too affected by negative interest rates, for many it’s been the wake up call needed to seek alternative investment solutions. So what alternatives are there?
- P2P Lending
Peer-to-peer (P2P) is where individuals or businesses lend money to borrowers through an online service that matches lenders with borrowers. Trusted platforms such as Lending Crowd and Zopa can provide returns anywhere between 3-14%. It’s important to diversify with the P2P platforms you use as you don’t want to lend all your money to one borrower.
- Offshore bank accounts
Due to the horrendously low interest rates banks are paying in the west, some people have decided to earn higher interest rates by banking overseas. Certain countries allow people to open up bank accounts without being resident and it’s all completely legal.
There are countries such as Ecuador, Georgia and Armenia where banks will pay you up to 7% interest a year. All these countries have relatively safe banking systems, some of the Georgian banks even being listed on the London Stock Exchange.
- AI Trading
A relatively new investment vehicle, these solutions typically use artificial intelligence and algorithms to automate trading activity. One company that offers automated trading is 8topuz. They are an award-winning and accredit business who have been producing minimum returns of 20% a year. Producing significantly higher returns than most other investment vehicles, making them one of the ways to build wealth.
The West is no longer rewarding savers and it doesn’t look like it will change anytime soon. Irrespective of whether interest rates are negative or not, if you want to make your money work for you then you ought to seek out alternative investment solutions.