Mostly I wouldn’t suggest that too many of us pay any attention at all to letters noting minor looking changes to the terms of conditions of corporate deposit accounts at Natwest and RBS (which owns Natwest). Not so this week. This week we all need to pay a lot of attention. The letter in question notes that ‘global interest rates remain at very low levels’ – something I think we all know. But goes on to say that ‘this could result in us charging interest on credit balances’ in the event that the UK base rate falls below zero. Yes, instead of paying its business customers interest on their money, the bank is warning them that it may soon be charging them interest on their money.
This wouldn’t be a global first of course: the ECB has a negative interest rate of 0.4 per cent on the go and Europe’s banks have been responding by passing the cost of that on to their customers. However it would be a first for the UK – and anyone who thinks it can’t happen, not just to business accounts but to personal accounts too, hasn’t been concentrating. A few years ago the very idea that interest rates could be negative was totally nuts. Now the question is not whether central banks can turn rates negative in their increasingly ludicrous attempts to force us to spend when we want to save but how negative they can make them go. It isn’t about whether you can you charge people to hold a deposit, it is about how much can you charge them. So what’s the answer? At first glance it looks as if you can’t charge that much – that rates can’t go negative beyond a percent or so. After all if it costs too much to have cash in the bank, people will simply take their money out, particularly in the UK where we are passionate about our longstanding right to ‘free’ current account banking. And taking it out doesn’t have to mean doing what monetary authorities want with it – i.e. spending it. It can mean shoveling it under a mattress, into a safe or if there really is a lot of it, into a bank vault (pension funds in Switzerland where the base rate is 0.75 per cent, have, I am told, been doing this since last year). Those with small amounts of cash can buy mini safes in the shape of everything from scented candles to coke cans (really..). Those with £100,000 can get a proper safe big enough for the lot for £4000. If they were planning to keep the cash for, say a decade, that might mean they’d technically be happy to shift their cash out of the bank when rates hit a negative level of not much more than 0.4 per cent (the current ECB rate). Chuck in a bit for inconvenience and security (most people will still think cash is safer in a bank than in a basement safe) and it would seem reasonable to say that -1per cent is about the limit.
The problem with this conclusion is that what looks reasonable to the likes of you and me often doesn’t look reasonable to central bankers. If -1 per cent isn’t enough for their stimulative purposes (and it won’t be), they’ll find a way to get it down more. And that of course means blocking your access to what you think of as your cash. Getting rid of or restricting access to higher value notes (your safe has to be a lot bigger and hence a lot more expensive to take £100,000 in tenners than in fifties). Putting limits on monthly cash withdrawals. And perhaps even banning cash. Central bankers have been talking for a long time now about finding a way to make cash redundant – to move us all over to using a digital currency that gives us all accounts at the Bank of England, controlled by the Bank of England (I’ve had several discussions along these lines but they’ve now put a report out on the matter) Once that’s done they can make rates as negative as they like – the only way for you to get money out will be to spend it on something. And at that point, with your cash suddenly a liability not an asset (it costs you to hold it in) spend it you will. Job done.