As the UK edges ever closer to a zero per cent interest rate, borrowing money has never been cheaper. Standing at a historic low of 0.25 per cent, further interest rate cuts are on the way as the Bank of England attempts to deal with the profound economic shock caused by the Brexit vote.
With economists predicting that a move to zero – or as near as damn it – is on the horizon, what does the rock-bottom interest rate mean for the entrepreneurs, the savers, the pensioners, the house buyers, the families, the strugglers and the workers who make up the Scottish economy?
Will the availability of cheap money encourage consumers to spend, buy property, invest in their businesses and thereby boost the economy? Bank of England governor Mark Carney and Chancellor Philip Hammond hope so.
The question is whether those hopes will materialise at a time when recession is looming. And given that low interest rates are good for spenders but bad for savers, what of those who have saved assiduously for their old age? They are now receiving next to no return on their investments and their pensions are under threat.
Marie Moser, an Edinburgh businesswoman, admitted the plummeting interest rates were encouraging thoughts of expansion.
Four years ago she opened her Edinburgh Bookshop in Bruntsfield. Since then the shop has thrived and she has paid off the £25,000 loan she took out to start the enterprise.
“It makes one think about the possibility of opening a second branch and that now is the time to do it,” Moser said. “I admit it is now in the back of my head. But I still think it has to be the correct strategic decision, which is the tricky bit. But you have to think the next few years are going to be the window to do it, because deals won’t be any better.”
However, there is part of Moser which can’t help feel a little cynical about the Bank of England’s low interest rates policy. Experience tells her that banks are not always willing to help out. When she sought a loan to open her bookshop, she struggled to find a lender even though she was taking over an existing business.
“Banks are actually, in my experience, incredibly reluctant to lend to small businesses and I suspect that won’t change. I think the million dollar question is will it actually make the money easier to get hold of? The answer for me is that I won’t know unless I try and I haven’t yet strategically decided that I want to.”
Moser’s concern is a genuine one. When Carney announced the cut from 0.5 per cent to 0.25 per cent earlier this month the Bank of England governor warned that lenders had “no excuse” not to pass on the benefits of lower rates to borrowers.
The Bank of England has promised to lend £100 billion to banks at a generous rate in an attempt to ensure lenders implement the cut.
Yet a number of major banks have yet to do so. The bailed-out banks RBS and Lloyds were among the mortgage providers who were reticent in their response to Carney’s announcement.
“There is a concern with low interest rates in that they put pressure on banks’ profitability – it is a concern that the decision to cut interest rates isn’t necessarily going to feed through,” said Sam Alderson, an economist with the CEBR (Centre for Economics and Business Research), who predicts a further cut to 0.1 per cent later this year and believes there is a possibility it will fall to zero.
One extreme outcome of this pressure on the banking system was outlined last month by NatWest when it warned it may start charging customers to hold cash if the economy deteriorates further.
The bank told one million of its business and commercial customers it could introduce negative interest rates: a scenario that would amount to customers effectively paying the bank to hold their savings.
The banks’ reluctance to pass on the rate reduction has been in stark contrast to their willingness to pass on cuts in interest on savings accounts – a policy which has dismayed many loyal customers.
One of the many savers affected is Jackie Cannon, the founder of The Way Ahead People, a Tillicoultry-based venture that provides support to businesses.
After years of prudent saving and at the age of 59, she had been hoping to slow down her hectic business life. Unfortunately the 0.25 per cent interest rate has put paid to that.
“I have worked for 40 years, and for 20 of those I have been on a high tax rate,” Cannon said. I have saved like mad and put all my savings away. I built the business from my savings, and from what’s left of those savings I am getting absolutely nothing. I have an ISA and I have just been advised they are going to drop that rate as well so that’s not worth anything now.
“I feel slightly aggrieved in the respect that I have worked hard all my life and I have saved – as people tell you to – all my life. I have done the right thing, bought ISAs and I have a pension. But at the end of the day what is it going to be worth? I am still working to pay the bills. Really, by now I should be saying it is time to take a rest, but I can’t afford to.”
The failure of the more traditional forms of investment means that people are beginning to look at alternatives from left field.
“The counter-argument is that you should be looking at a diverse investment portfolio anyway,” said Gordon Kaye, director of Cathcart Associates recruitment agency. “As the interest rates drop there are other investments that improve: old-fashioned things like gold and platinum and minerals. Then there are the more bizarre investments like classic cars. There will always be the astute investor who will find alternatives. But I suppose that is a lot harder than just putting it in basic trusts or putting it in the bank.”
If they are not helping conventional savers then, in theory, the low interest rates should be helpful to the mortgage-paying public. But the reality is that only those with certain kinds of mortgage products will benefit immediately.
People on tracker mortgages, where repayments vary with the Bank of England’s base rate, should benefit from a Bank of England cut.
For example, someone with a 25-year £250,000 repayment tracker mortgage would have seen their monthly £1,100 repayment fall by about £30 when rates went down to 0.25 per cent.
Not many people, however, are on tracker mortgages. In recent years people went for fixed rate deals believing that interest rates were likely to rise. Before the Leave vote turned the economic world upside down, people wanted to lock in to what were then considered low rates for a couple of years. Therefore those on fixed rates will not see any immediate benefit.
Lowering the interest rate helps exporters. It makes holding sterling less attractive, which means there is less demand for the currency on foreign exchanges. The pound therefore falls, which makes exports cheaper when being bought with foreign currencies.
As ever, there is a downside. The falling pound makes imports more expensive, which leads to a rise in things such as food and fuel costs, which brings with it a risk of inflation.
There are those who believe reducing the interest rate is the wrong thing to do. People like Elizabeth Marshall, who is an energy economist who has spent a lot of time in the Far East.
Marshall believes the example of Japan, where lowering interest rates failed to stimulate demand, offers a cautionary tale.
“We don’t need lower interest rates,” she said. “We need the reverse if we are going to restore our economy. You raise your interest rates, you increase your savings so you increase your investment for industry. We have absolutely got to do the counter-intuitive thing [and raise interest rates] rather than follow the crowd and follow the lemmings over the cliff. In my view it is totally the wrong policy that is being pursued by the Bank of England.”
Other economists, however, disagree. According to Professor Brian Ashcroft at Strathclyde University’s Fraser of Allander Institute, lowering interest rates is a sensible use of monetary policy when times are tough.
“The problem is that they are doing the right thing, but the impact is likely to be fairly small,” he said.
Cutting the interest rate proved effective in the aftermath of the 2008 banking collapse when there was a systemic failure of financial institutions. This time round, the economic challenges have the turbulence surrounding Brexit at their root.
“The problem now is uncertainty about the real economy,” Ashcroft said. “We are uncertain if there is going to be continued access to the single market or not. The problem is that monetary policy struggles here, because what we really need is companies which are confident enough to invest and households that feel confident enough to make some big ticket purchases. Monetary policy doesn’t help very much here when it is all about confidence in the real economy.
“House prices have probably topped out and are maybe falling a bit. The stock market is flat. All of that means people’s asset holdings and our feeling of wealth has been diminished and not just on our income but also our wealth holdings.
“Presumably this uncertainty will continue until we go through this divorce process. What we require, in my view, is for the government to relax its fiscal policy stance and invest more.”
Ashcroft believes the Chancellor should use the coming Autumn Statement to move further away from George Osborne’s austerity. This could be done by tax cuts or increasing spending on capital projects.
Dr Angus Armstrong, director of Macroeconomics at the National Institute of Economic and Social Research, agrees.
“Two or three years ago you could make a good argument [for lowering the interest rates] but now, as you get to zero, it is like ‘Okay guys, when do you give up?’ Fiscal stimulus is now an obvious policy response.
“There has not been a time since the Second World War when we have not known anything about government policy. But now we don’t even know what their aims are. It’s amazing.
“What is the government’s policy towards public spending? We have no idea and we are going to have to wait until the Autumn Statement.”