UK Low Inflation. Plus: the plausibility of a negative interest rate

What affect low Inflation could have

Firstly, let’s be mindful of inflation this year which fell to 1% in July and 0.2% in August. It was schemes like Eat out to Help Out and cutting VAT in various sectors that saw prices rise at their slowest rate in five years.

This is incredibly significant.

The Bank of England which cut the interest rate to 0.1% earlier this year, departing from its 2% target. The Government likes mild inflation and must avoid deflation. If we know the prices are going to be cheaper next month, we’ll delay purchases and demand will fall.

So, normally what happens when you see inflation falling, one of the things the Bank of England does, to try and increase inflation, is to cut interest rates. Aha, but if you do that when the interest rate is 0.1% you are looking at a negative interest rate.

There is a plausibility, not a prediction of a UK negative interest rate

There is a plausibility, this is not a prediction, of negative interest rate, the Bank of England has written to banks (October) asking them to provide details on how they would cope if interest rates were cut to zero or even turned negative.

The Bank of England have also been defending and making a case, ‘for’ negative interest rates – it’s worked in other countries such as, Japan and other European countries. Nonetheless, it’s still crazy to think it will cost you moneyto keep your savings in the bank.

Naturally, this will give people encouragement to invest it, into assets that will give an annual return, or alternatively, spend it – which is exactly what the government and The Bank of England want people to do.

We know that savings are dire at the moment, with top saving rates at 0.96%, but there is no need to rush to start hiding your savings under the bed. Even in the worst-case scenario, where you pay to keep your savings in the bank, you at least have £85,000 per person per financial institution FSCS protection.

Challenges for banks with a negative interest rate, is a herd mentally to pull money from their banks, but the fundamental point for savers is, do what is right for you. If immediate access to an individual’s entire savings pot may be needed, then it’s probably better left insavings in the bank, if not and only access to some is required, it’s worth considering and asking the question should a proportion of it be invested?