John Charcol senior technical manager Ray Boulger reckons it’s a case of ‘never say never’ on the UK following Japan and Switzerland by adopting negative interest rates.
In a surprise move today the Bank of Japan applied a negative interest rate of -0.1% – meaning commercial banks will be charged to hold deposits from the central bank rather than accruing interest on the money. Switzerland also has a negative interest rate of -0.75%.
The move is significant for the UK because Japan was the first economy to experiment with quantative easing – the creation of money to buy assets – to fight deflation in 2001.
Boulger pointed out that it was once unthinkable that the UK could imitate Japan and adopt QE itself but then the recession hit and UK has been running its own QE programme since.
He said: “Both quantitative easing and low interest rates would were unthinkable 20 years ago.
“It’s unlikely we’ll ever follow Japan but never say never.
“Japan’s had low interest rates for 30 years but going negative is a very big step.
“What you have to remember is the relationship between inflation and interest rates. If you have negative inflation then the real value of your money in banks is increasing.”
In Switzerland and Japan banks face a tiered interest rate which gets progressively worse as their deposits at the central bank rise.
The same story is often the case for consumers, who won’t receive negative interest rates on their savings in commercial banks unless deposits exceed a certain level.
Adrian Lowcock, head of investing at AXA Wealth, said: “The decision has caught many by surprise as further QE was expected but not negative rates.
“Stock markets have reacted positively to the announcement and taken it as a clear sign that central banks are still willing to support markets.
“The rate cut also seen as an indication the Bank of Japan is determined to reassert inflation, although the 2% target has been pushed out even further to 2018. The cut has also weakened the Yen which is good for Japanese exports as they become cheaper.”
Boulger explained that the turmoil surrounding the global financial markets at the start of the year – with falling oil prices and a weakening Chinese economy – will create winners and losers. Some of the winners will be UK consumers who could see mortgage rates stay lower for longer.
He added: “Unlike 20 or 30 years ago the whole global economy is so interlinked that when things happen in Japan and the USA the world is affected the same day.
“One of the main influences on the global economy this year is going to be the lower oil price. Economies that are dependent on oil like Russia are clearly going to take a massive hit and there will be some companies that go bust because of it.
“If it looks like GDP is going to slow then bond prices will rise as gilt yields have fallen quite sharply today. From the mortgage perspective that’s good news.
“If the economy is weakening it has negative implications on the market, but falling gilt yields will mean mortgage rates are going to remain very affordable so there are pros and cons.”