Negative Interest Rates: Necessary Evil or Symbol of Greed?
Last week NatWest and its parent, the Royal Bank of Scotland, raised the prospect of negative interest rates in letters to 1.3 million business customers.
Negative interest rates turn the world of savings on its head in a reversal of the obvious and important incentives of the industry.
Usually a person is paid to save, receiving interest on their cash. That encourages people to put money away for the future, choosing not to spend today but to wait for the money to grow.
The other side of the transaction is borrowing. If an individual or business wants to spend now rather than save up for an investment or big purchase, they have to pay for the funds in the form of additional interest costs.
Customers find it hard to understand the idea of turning that upside down, and small businesses have reacted with disbelief.
One problem with that approach may be that if one bank goes negative, others could follow. Currently the big banks are well funded and so do not need to work to attract small business deposits.
Britain is not yet at that stage; while rates are low for savers and at zero on a typical business account, banks remain wary of dipping into negative territory.
However, potential trigger points remain which could tip British banks over the threshold. This Thursday, the Bank of England will reassess rates, and markets anticipate a cut from 0.5% to 0.25%. It is possible that this could prompt banks to cut rates on deposit accounts to below zero.
When the Bank of England cuts rates, the income from loans falls, particularly on those such as tracker mortgages that are linked to the base rate. But if the rate paid to customers with current accounts or savings accounts already stands at close to zero, then banks have not been able to protect their profits by going negative.