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Banking turned on its head?

How many times have we heard that?

How many High Street banks have promised that and how many times?

How many new, so called challenger, banks have promised that?
It hasn't happened.

You may have flown Virgin Atlantic to the US but you’re probably unlikely to bank with Virgin Money.

Has it ever been true?
Well in Continental Europe today, in some countries, it really is. In Sweden, Denmark and Switzerland, central bank rates are negative; -0.75% in Denmark and Switzerland. The European Central Bank too. In this topsy-turvy world, central bankers are so alarmed at the prospect of weak or negative inflation that they have cut borrowing costs below zero, which means conversely that they are charging financial institutions to leave their accounts in the black.

Pay to deposit your own money!?
So inevitably now Swiss pension funds are considering stashing cash in secret vaults. With Swiss Franc 1,000 and Euro 500 notes this is much easier than in the UK with our puny £50 note maximum! Negative rates pic

The idea of being paid to borrow and charged to deposit is hard to understand. So far it’s only happening occasionally to retail customers. By the time banks add fees to borrowers, it costs to borrow. And as regards depositors, so far banks have chosen to bear the cost with a few exceptions. But negative rates were supposed to be temporary. As time goes on banks may end up deciding to pass on the costs. The politicians and the policemen won't want mattresses stuffed with cash - think of the crime figures. And some banks in Germany, including Commerzbank and HSBC, have started charging some depositors to save in some currencies.

Economists see all this as a late awakening to reality. While nominal (actual) negative rates are rare, real (i.e. inflation adjusted) negative rates are more common.

When inflation was 5.2% here in late 2011, bank base rate was already 0.5%. So it was "costing" a lot more to deposit money at 0.5%, in real terms, than if inflation is -0.1% and your bank is charging you -0.5%; but no-one lives in the world of economists, do they?

Could negative rates happen here?
The Bank of England Governor, Mark Carney, says that he expects the next move in interest rates to be up and he expects it to be next spring. But he's been wrong on interest rates before. The Chancellor George Osborne has been saying that our negative inflation is the "good" sort. Nevertheless banks in the UK have been thinking about whether their systems could cope with negative rates because they simply weren't set up with any such expectation.

I think I'd put my money in the freezer, but that's the first place burglars look apparently!

By Mark Bogard

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