Negative rates in UK? How to protect yourself if Bank takes interest rates below zero
By Adrian Lowcock, Head of Personal Investing at Willis Owen
Last month the Bank of England indicated they were reviewing the idea of negative interest rates as the impact of COVID takes its toll on the UK economy.
While we are not likely to see any such move until next year, the fact the Bank has acknowledged it may resort to this policy is already having implications for investors.
Negative interest rates have been used elsewhere – including Japan and Mainland Europe – with mixed results. What it means is that banks would have to pay the Bank of England to hold money with it, a departure from the normal scenario where banks receive a rate of interest for doing so.
The main risk for savers is that, if rates do go negative, the return on cash – already paltry – could also turn negative. At the very least, negative rates would mean they are unlikely to rise anytime soon.
The cash market is competitive and you typically get a better rate the longer you fix your savings for, so there are still ways to access positive returns on cash, but it is becoming harder than ever to do so in a standard bank account.
For those concerned about negative rates, there are also several alternative options to holding cash that can potentially generate higher returns if rates do go negative.
Below we identify three potential areas:
Gold – The precious metal offers no income via an interest rate at all, but in a world of negative interest rates this can start to look attractive. Negative rates are also a sign that not all is well in the world, and with gold’s status as a safe haven investment, it can also provide some diversification for portfolios. BlackRock Gold and General fund, managed by Evy Hambro, invests in large gold miners with high quality assets and may also have exposure to other precious metals.
Growth shares – In a low or negative rate environment any growth companies can achieve becomes more attractive and more valuable. Companies which can determine their own future and grow irrespective of the economic climate will be in demand. Smaller companies are a good hunting ground for businesses which can grow in niche markets or utilise new technologies to transform industries. However, they are not without risks, being far more volatile than cash. Merian UK Smaller Companies fund, managed by Dan Nickols, top holdings include Boohoo and the recently floated e-commerce specialist The Hut Group.
Overseas shares – Negative interest rates in the UK are likely to impact the value of sterling in international markets, causing it to drop. Exposure to overseas equities will diversify you away from sterling which means investors could benefit from a fall in the value of the pound (as overseas shares are priced in other currencies and therefore the amount you get back in sterling goes up as sterling itself falls). Chief executive of Fundsmith Terry Smith’s investment philosophy is to buy and hold, ideally forever, high-quality businesses that will continually compound in value.
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Enquiries
Adrian Lowcock Chris Tuite
Head of Personal Investing Director
Willis Owen MRM Communications
07849 846387 020 3326 9915
Adrian.lowcock@willisowen.co.uk chris.tuite@mrm-london.com
Notes to Editors
Willis Owen is one of the UK’s leading online investment service providers. Founded more than 20 years ago Willis Owen now has around £1bn of funds under management.
Willis Owen Limited is authorised and regulated by the Financial Conduct Authority.