Ready for negative interest rates?

The prospect of negative interest rates in the UK has become very real, making it harder by the day to defend the notion that “cash is king”. Here is what investors need to know to prepare.

Investors have to be ready for a long period of rock-bottom or even negative interest rates, and may have to completely revise their financial plans as a result, experts are warning.

September’s meeting of the Bank of England’s Monetary Policy Committee may have seen interest rates held at 0.1% (a record low), but it was made clear that negative interest rates are now seen as very much an option in the fight to stabilise the economy. In fact, the BoE’s acknowledgement that it is exploring how negative rates could be deployed were taken so seriously by the markets that sterling took a dive.

Experts are saying that negative interest rates could come as soon as February 2021 in the UK, depending on how COVID-19 and Brexit are playing out economically, adding the BoE to a growing band of central banks implementing negative interest rates (including those of Switzerland, Denmark and Japan, as well as the EU). The US is thought to be readying for negative interest rates too if warranted, or at least holding rates near zero for at least five years.

The new normal

Interest rates turning negative may sound slightly apocalyptic, but such measures are clearly becoming normalised in these most unusual times. The task of the investor is to ensure that they are facing up to the new normal of ultra-low or negative interest rates for the foreseeable future, rather than clinging to the old.

The task of the investor is to ensure that they are facing up to the new normal of ultra-low or negative interest rates for the foreseeable future, rather than clinging to the old

Savers are unfortunately very well used to desultory interest earnings from mainstream banks by now, after years of already rock-bottom rates. But one possible feature of the future that may come as quite a shock is having to actually pay your bank to keep cash on deposit. This has already been seen in other negative interest rate countries.

What makes these developments even more worrying is the extent to which Britons seem to be simultaneously retreating to cash. Around a third of UK investors plan to put more of their wealth into cash over the coming year1.

Action points for savvy savers

We are living through an unprecedented economic crisis, with Brexit and US presidential elections also looming amid a panoply of uncertainties, and in such times it might be easy to think of cash as “safe”. The reality is that it is likely to be anything but. If your cash isn’t earning at least as much as inflation, then value of your savings can be dramatically eroded over time.

If your cash isn’t earning at least as much as inflation, then value of your savings can be dramatically eroded over time

With experts calling the savings market “beyond repair”, the task of the savvy investor is twofold.

The first is to ensure that any cash that you wish to remain as such is adequately protected and earning as much as possible.

Ensure that you are only making deposits with regulated, stable institutions and not exceeding the Financial Services Compensation Scheme protection limit of £85,000 with any single one.

Then, open your mind to those that may offer more attractive rates. Private banks extend all the same protections as High Street ones, but are able to offer far greater rewards for those with significant amounts to deposit

Then, open your mind to those that may offer more attractive rates. Private banks extend all the same protections as High Street ones, but are able to offer far greater rewards for those with significant amounts to deposit. You may also find interesting “term deposit” deals, which could only tie up your cash for a year or even less.

Second, and arguably even more important, is considering alternative “safe havens” for your wealth that will make it work harder.

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Top Tip

At one end of the spectrum we see investors retreating into the supposed safety of cash while at the other people are diving headfirst into alternatives. For most people, the “right answer” lies somewhere in between those poles. Even if you are a very cautious investor who has previously clung to cash, talking to a wealth manager about the conservative investment strategies they can devise. Far greater rewards, for not very much additional risk, are eminently possible.

Lee Goggin - Co-Founder

Lee Goggin

Co-Founder

Open minds required

There has been a huge amount of hype around gold and cryptocurrencies stemming from the crisis, with both seen as hedges against inflation and devaluing currencies and so soaring in value in recent months. However, although there may well be a strong case for adding some element of alternative investments to your portfolio, there is unlikely to be one for ploughing a significant amount of your wealth into what are undeniably volatile assets, all in the name of safety.

These needn’t be lost years in terms of growing your wealth; there are suitable investment strategies that will serve even the most conservative investor very well through these times

Cautious investors are going to need to be open-minded, particularly since yields from many low-risk bonds (like US Treasuries) are also on the floor, but they certainly shouldn’t be despondent.

These needn’t be lost years in terms of growing your wealth; there are suitable investment strategies that will serve even the most conservative investor very well through these times.

Count the costs of cash

The takeaway for those holding significant amounts of cash is that they now need to think hard about how much this supposed safety will actually cost them – in terms of eroded value, foregone returns and potentially even in bank charges going forward.

Making this cost-benefit analysis, many will find that cash should take much more of a back seat for now.

People holding significant amounts of cash and who are wondering how best to deploy it to maximise their wealth long-term have always formed a high proportion of our users. We expect that to keep climbing as the costs of cash start to really be felt

People holding significant amounts of cash and who are wondering how best to deploy it to maximise their wealth long-term have always formed a high proportion of our users. We expect that to keep climbing as the costs of cash start to really be felt.

If you are beginning to wonder if your cash could be working harder, or feel your financial strategy needs to be revised for the circumstances we find ourselves in, then you are in good company. Record-breaking numbers of enquiries tell us savvy investors aren’t taking the financial fallout of the crisis lying down.

Whether you would like to revise your existing wealth management strategy, or need one from scratch, there is a solution precisely suited to your needs. Let us help you find it fast and free of charge through our online matching system.

1 HYCM, August 2020

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