RBS May Charge Firms to Hold Deposits if Interest Rate Cut Below Zero

A letter sent to 1.3 million business customers warns that RBS may start charging interest on credit balances.

The Royal Bank of Scotland (RBS) and Natwest may become the first British banks to charge businesses to hold their cash if the Bank of England takes benchmark interest rates below zero.

A spokesperson for RBS, which also owns Natwest, said that a letter was sent to around 1.3 million business and commercial customers of the two banks warning that with global interest rates at “very low levels” the bank could be forced to start “charging interest on credit balances” depending on future market conditions.

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He added: “We will consider any necessary action in the event of the Bank of England base rate falling below zero, but will do our utmost to protect our customers from any impacts. ” He did, however, state that it was “very unlikely the bank would pass the cost onto customers.”

Monetary Easing

UK interest rates have not changed since the Bank of England (BoE) cut them to 0.5% in early 2009 at the height of the financial crisis but governor Mark Carney has said “some monetary policy easing” may be required to boost the UK economy in the wake of the Brexit vote.

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Although he is said not to favour rates falling lower than 0.25% some economists believe that rates could still be cut to zero or lower later this year.

This in effect means that the normal relationship between banks and customers is reversed whereby the lender has to pay the bank for holding their money.The aim is to encourage more borrowing and spending by firms and less saving.

Negative Interest Rates

In 2014, the European Central Bank was the first major central bank to introduce negative interest rates, with the aim of encouraging banks to lend to businesses rather than hold on to money.

The latest news from RBS comes in advance of the BoE’s closely monitored monetary policy meeting and August inflation report due next week in which the central bank was widely expected to cut interest rates to allay financial market fears in the aftermath of the Brexit vote.

However, it is not anticipated that the BoE will lower interest rates below zero any time in the near future. Carney indicated cutting rates to zero is the lower bound as negative rates could hurt banks and building societies.

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