Negative interest rates could spell the end of free banking, experts warned after the Bank of England gave its clearest indication yet that the controversial policy could be introduced.
The Bank has written to UK lenders’ chief executives asking them to set out their readiness for negative rates, raising the prospect of an unprecedented move below zero as the recovery begins to slow.
It could trigger massive losses for lenders – forcing them to start charging millions of customers a monthly fee, according to analysts and grandees.
Sir Philip Hampton, who was chairman of taxpayer-backed Royal Bank of Scotland at the height of the financial crisis, said: “In the case where negative rates are significant and prolonged, and are charged on current accounts of ordinary earners, I think there’s likely to be a strong customer reaction and pressure to make the revenues fit the costs with more transparency. That probably means fees.
“The alternative could be negative interest rates on bigger deposits. That mainly hits the better off who can usually afford it but also pensioners and other savers. But these events often lead to something fairly radical.”
Threadneedle Street has already slashed rates to an all-time low of 0.1pc, wrecking banks’ profits and landing savers with a return of close to zero on their deposits.
If rates go negative, banks will be charged for hoarding cash rather than lending it out. Businesses and ultra-wealthy customers with large balances are thought likely face fees for deposits as a result.
Insiders at the country’s high street banks sought to play down the risks of general consumers also being hit, but experts said they could nonetheless be forced to act.
Mike Hampson, who runs consultant Bishopsgate Financial, said: “It’s only a matter of time before free banking as we know it comes to an end.
“Banks have been looking at ways to charge for running accounts, and the challengers have, in particular, struggled to make money in the current environment.”
Britain has long been unusual for not charging a current account fee, unlike most other Western nations. Instead, banks recoup their costs through add-ons such as overdraft and foreign transaction charges, as well as by lending out depositors’ money at interest.
Former Bank of England policymaker Andrew Sentance, of Cambridge Econometrics, pointed out that regulators said in 2018 that there is no such thing as free banking because lenders load customers up with hidden bills.
He added: “The way banks approach their customers won’t be helped by negative interest rates. They will be under pressure to increase their margins in other ways.”