In this article, we discuss the possibility of UK interest rates falling below zero and we consider some of the practical considerations and implications for assets and liabilities of negative interest rates. 

With economies facing deep recessions from the economic shock caused by the COVID-19 pandemic, all measures to boost demand will likely be on the table, especially if fiscal policy was constrained by politics or the size of sovereign debt burdens. These measures include the potential for UK interest rates to go negative.

Negative interest rates were already in place in many developed economies well before the pandemic. The European Central Bank (ECB) was the first out of the traps when they lowered the deposit rate for commercial banks to -0.1% p.a. in June 2014. Denmark, Japan, Sweden and Switzerland are countries that have all since taken policy rates negative.  The ECB, Japan and Sweden deployed the policy with the aim of rekindling inflation expectations while Denmark and Switzerland have used negative rates to halt currency appreciation and reverse massive capital inflows.

The BoE cut interest rates to 0.1% p.a. in March 2020 and restarted purchases of government bonds under their Quantitative Easing (QE) programme. The tone has changed noticeably on the use of negative interest rates this year: initially described as something the bank was not “planning or contemplating”, negative interest rates are now under “active review”. In fact, current market expectations are indicating that interest rates could fall into negative territory in Q3 next year. 

Read our full article for more information on:

• Negative interest rates not new
• Implications for value of assets and liabilities
• Implications for hedging
• Implications for cash and other debt assets
• Implications for derivatives 

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