NatWest raises prospect of negative interest rates

negative interest rates

One of the UK’s main high street banks has indicated that it could be the first to break with tradition by introducing negative interest rates.

National Westminster Bank, aka NatWest, whose parent is Royal Bank of Scotland (RBS) raised the prospect of levying charges to accept deposits in a letter changing the terms and conditions for the bank’s 850,000 business customers.

In the letter, NatWest states: “Global interest rates remain at very low levels and in some markets are currently negative. Dependent on future market conditions, this could result in us charging interest on credit balances.”

Commenting on NatWest’s move, Ray Boulger, senior technical manager at mortgage broker John Charcol, told The Guardian newspaper: “It is going to make businesses much less keen to hold significant balances in their accounts. If NatWest start doing this, other banks are likely to follow. Eventually personal customers with large balances could be hit, but the banks may decide that is going too far and take the hit themselves.”

Interest rates on government and corporate bonds have fallen sharply since the UK referendum on the country’s membership of the European Union (EU) on June 23 saw British voters support a withdrawal, aka ‘Brexit’.

The Bank of England (BoE), which cut base rate to a record low on 0.5% back in March 2009, was expected by many earlier this month to sanction a further reduction to 0.25%. Although it held off, it is likely that the cut will be agreed by the BoE’s monetary policy committee when members meet on August 4.

Some MPC members have spoken of the possibility of the base rate being further reduced to below zero, but BoE governor Mark Carney told members of parliament (MPs) in April this year: “We think we could move base rate closer to zero but have not said we have an appetite for negative interest rates.”

James Sherwin Smith, chief executive officer (CEO) of Growth Street, an alternative finance platform for small and medium enterprises (SMEs) based in the UK, commented that the prospect of having to pay a bank to hold deposits would be “the last straw” for many businesses.

“Businesses are not receiving the financial support they need from banks,” he added. “Business overdraft lending by banks is down 50% in four years. Many businesses have resorted to holding deposits to survive dips in cash flow. This in itself is concerning, as businesses cannot reinvest profits, reducing growth and levels of employment. Negative interest rates only add insult to injury.

“This news further highlights the need for a competitive and wholly diversified business finance sector. The government must ensure that it supports alternative providers so that SMEs are not reliant on large banks.”

Were the BoE to change policy and cut base rate below zero, it would be following the lead of the European Central Bank (ECB), which charges other banks 0.4% to deposit cash, while the Swiss National Bank (SNB) charges domestic banks up to 0.75%.

Last week, Netherlands bank ABN Amro issued a similar alert to NatWest’s by advising customers that “exceptional market conditions” meant that it could become necessary to introduce negative interest rates at some future date.

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