RBC predicts rates will be cut to minus 0.15pc in February in a move that would harm pensions and the economy's recovery from Covid
Negative interest rates could send final salary pension schemes plunging further into the red and hammer firms seeking to recover from the Covid crisis, analysts have said. It is feared that below-zero rates being considered by the Bank of England would crush the returns made by company retirement plans, leaving them unable to pay what has been promised to members.
This would force employers to divert billions of pounds into plugging the gap - money which could not be used to invest in growth, hire staff or pay down pandemic debts as a result.
It comes after experts warned on Monday that negative rates could bring an end to free bank accounts for the general public by crushing lenders' profits. Former Conservative pensions minister Baroness Altmann said negative interest rates would make the problem even worse.
The Pension Protection Fund estimated that the deficit of Britain's 5,422 final salary pension schemes - the difference between what they owe members and the value of their assets - widened to £166bn at the end of September. It cited plummeting gilt yields as one of the main reasons for the jump, driven down by rock-bottom central bank interest rates that stand at just 0.1%.
Andrew Bailey dismissed the idea of cutting interest rates below zero when he became the Governor of the Bank of England in March but there has been growing debate about the move at Threadneedle Street as officials plot to shore up the economy in the face of a second Covid wave. This week deputy governor Sam Woods asked commercial banks what steps they would need to take if official borrowing costs were pushed into negative territory. Some members of the Monetary Policy Committee (MPC), including Silvana Tenreyro and Jonathan Haskel, have suggested they are open to using negative rates to boost the coronavirus recovery, citing the experience of other countries as encouraging.
Peter Schaffrik at Royal Bank of Canada predicted that the Bank would cut rates in February next year given that the Government’s decision not to extend the furlough scheme is likely to drive up unemployment, hitting consumer spending and economic growth. Mr Schaffrik added that even if a European Union trade deal is reached, the UK economy is heading for “a perfect storm” in the first quarter of next year that would nudge the MPC to cut rates by minus 0.25 points to minus 0.15%.
Sir Steve Webb, a former pensions minister and now partner at consultant LCP, said that prolonged low interest rates would be harmful for pensions and the broader economic recovery from Covid.