The Bank of England is the UK’s central bank. As the UK’s central bank, one of our main jobs is to keep inflation low and stable.
One of the ways we do that is by setting the official interest rate, known as Bank Rate. This is the single most important interest rate in the UK, as it acts as a reference, or ‘base’ rate, for all sorts of other financial products.
For over 300 years, the official interest rate has been positive (more than zero). The earliest rate we have on record was 6% in 1694. Since then, the official interest rate has ranged from 17% (in November 1979) to 0.1% (in March 2020).
Can interest rates be negative?
Yes, interest rates can be negative. Some countries have already implemented a negative official interest rate. These countries include Switzerland, Sweden, Denmark and Japan, along with the euro area.
While the official interest rates that central banks set in those countries have gone negative, that generally doesn’t mean that the interest rates on people’s bank accounts have been below zero.
And while the interest rates on the money people borrow have generally fallen, they have still tended to be above zero, too.
Does this mean the Bank of England is going to set Bank Rate negative?
This is not happening at present. The Monetary Policy Committee (MPC) is responsible for setting Bank Rate. At the moment, the MPC judges that negative Bank Rate isn’t necessary to hit the inflation target of 2%.
The MPC will continue to assess the best way to manage monetary policy, and will keep the appropriate tools for achieving low and stable inflation – including lowering Bank Rate – under review.
Why would a central bank set a negative interest rate?
Sometimes, lower interest rates might be needed to help central banks achieve their targets for inflation. And in some countries, that has meant making base rates negative.
When interest rates are low – or even negative – financial firms are more likely to charge lower interest rates on loans to customers. Customers will then spend this money on goods and services, which helps boost growth in the economy and inflation.
Lower interest rates also tend to lead to a lower exchange rate. A lower exchange rate, in turn, will tend to mean that exports of goods and services are cheaper for people in other countries to buy. And a lower exchange rate will also tend to mean that goods and services from abroad cost more.
So a central bank might want to lower interest rates if growth or inflation is too low.
How could a negative interest rate affect UK financial firms?
High street banks and other financial firms keep a close eye on Bank Rate. That’s because many of them hold deposits at the Bank of England, which are called ‘reserves’.
When Bank Rate is positive, the Bank of England pays interest on these reserves. The amount of interest paid depends on what the rate is. If Bank Rate were to be negative, these firms would have to pay interest on keep their deposits at the Bank of England.
How could a negative interest rate affect me?
A negative Bank Rate would not automatically mean you would be charged by your bank to look after your money. In countries where the central bank has already set a negative interest rate, people can typically still keep money in their bank account and not get charged.
Borrowing money from a bank, for example for a mortgage, tends to become cheaper when Bank Rate Rate is reduced, and that would also apply if Bank Rate became negative. But the interest rate paid on a loan is would still probably remain above zero.