Negative interest rates could be on the horizon, but what will this mean for investors?

by | Nov 25, 2020

Share this article

Facebook Open Graph

Brace yourself – December is set to be another busy month for investors. Instead of winding down for the festive break, the financial markets will be alive with activity in response to the latest political and economic events.

COVID-19 remains an obvious concern, as does the ongoing uncertainty surrounding the transition of presidential power in the US. And then there’s Brexit – the UK is scheduled to leave the EU on 31 December, yet there has been no indication of how this withdrawal will be managed or if there will even be a deal in place by the New Year. The latest news is some comments from UK’s Chief Brexit negotiator Frost who was reported by the Sun on 15 November as telling PM Johnson to get ready for a Brexit deal early in the week beginning 23 November. Will Brexit finally ‘get done’? Only time will tell.

However, all these point towards another potentially volatile month of trading. What’s more, investors have also been grappling with the prospect of negative interest rates being announced for the first time.

 
 

Negative interest rates

For months, the Bank of England has been hinting that negative rates are on the horizon. With the Bank’s Monetary Policy Committee meeting on 17 December, there is even a chance of rates going into the red before the end of the year. While this seems unlikely right now, it is still possible that rates could fall into negative territory in Q1 2021.

The Bank of England is naturally hesitant about taking this step. We have never before experienced negative interest rates and investors are not sure of its short-, medium- or long-term implications given there is no historical precedent. Of course, some of the answers can be found by understanding the basic theoretical principle of interest rates.

 
 

In short, they are used to influence saving and investment behaviours. High interest rates compel people to save money and reduce spending. Conversely, low or negative rates encourage people to spend and invest due to the opportunities to take on debt and the lack of return available from cash savings. The decision to adjust interest rates is based on the rate of inflation at the time: high interest rates lower inflation, whereas low interest rates increase inflation and spur economic growth.

In the event of negative interest rates, cash stored in a traditional savings accounts will take a hit. Banks are likely to slash their existing rates further, and this will affect variable savings accounts, such as easy access savings accounts. As cash will be generating no returns, any capital stored in a bank savings account is positioned to generate minimum returns. Theoretically, banks could even charge customers for holding their cash, but this is not something we are likely to see due to its obvious unpopularity.

Invest or stick with savings?

 
 

As Coghlan outlines, depending on their attitudes to risk, those with significant cash in savings accounts could consider alternatives such as investing into stock markets or commodity-based investments. In particular, he highlights the attractions of investing in Platinum from mid-December through to February 20 as he points out that seasonally, demand for Platinum at this time of year and over the last 25 years it has increased in 22 of those 25 times.  Of course, there is always the option of leaving their cash in a savings account taking advantage of the security offered even if this does incur a cost.

Interestingly, the research commissioned by HYCM in Q3 2020 revealed that cash savings are still the de facto choice among investors, with 78% having funds in savings accounts. At the time, 32% said they would be putting more of their money into cash savings over the next 12 months. Clearly, in times of uncertainty, investors prefer security and low-risk investments over those that are significantly exposed to market shocks.

Given December and the ensuing months will no doubt trigger more volatility across the financial markets, a mass retreat from cash savings is not anticipated, even if negative interest rates are announced. Sometimes an investment strategy is not simply driven by returns, but a desire for security and the protection of wealth.

Giles Coghlan is Chief Currency Analyst, HYCM – an online provider of forex and Contracts for Difference (CFDs) trading services for both retail and institutional traders. HYCM is regulated by the internationally recognized financial regulator FCA. HYCM is backed by the Henyep Capital Markets Group established in 1977 with investments in property, financial services, charity, and education. The Group via its relevant subsidiaries have representations in Hong Kong, United Kingdom, Dubai, and Cyprus.

Share this article

Related articles

IFAM 127 | Not if, but when | April 2024

IFAM 127 | Not if, but when | April 2024

Not if, but when… Spring finally seems to have arrived! Since our last edition, we have had the Spring Budget and the Bank of England (BoE) rate announcement to name but a few important landmarks. This has kept us, like all of you I am sure, quite busy over the last...

Sign up to the IFA Magazine Newsletter

Trending articles

IFA Talk logo

IFA Talk is our flagship podcast, that fits perfectly into your busy life, bringing the latest insight, analysis, news and interviews to you, wherever you are.

IFA Talk Podcast - listen to the latest episode

x