Negative interest rates: Could UK be next?

Negative interest rates: Could UK be next?

The idea of savers being charged to keep their money in the bank might seem extraordinary even in an era of unprecedented monetary policy measures - and has never happened before in the UK.

Now one of the country's biggest banks, NatWest, part of RBS, has warned its business customers that it may have to charge for deposits. The announcement comes ahead of a meeting by the Bank of England next week which is widely expected to set a further historically low interest rate.

NatWest wrote in the letter: "Global interest rates remain at very low levels and in some markets are currently negative. Dependent on future market conditions, this could result in us charging interest on credit balances."

Mark Carney, the governor of the Bank of England, has expressed resistance to negative interest rates in the past. This measure is usually adopted in an effort to get banks lending more money and businesses investing and spending it.

The UK's large financial services sector and its profitability are particularly important to the country, which may discourage rate setters from moving to negative rates.

However, in the recent case of Switzerland, there has been evidence that banks had increased costs on loans like mortgages to reduce their losses from negative rates - a move that could limit consumer spending.

Expectations for the Bank of England to cut rates by 25 basis points to 0.25 per cent next month are growing. While the central bank is not forecast to mimic its counterparts at the European Central Bank, Swiss National Bank or Bank of Japan by moving to negative interest rates any time soon, it is expected to hold rates at what would be a further historic low until the end of 2018, according to forecasts from Capital Economics.

Michael Pearce, global economist at Capital Economics, told CNBC he thought that the BoE was "quite a long way away" from negative deposit rates, if it ever enacted them.

The news of NatWest's letter caused consternation in the UK, where recent data from the British Bankers' Association (BBA) showed business borrowing dropped for the first time in June as businesses delayed investment ahead of the Brexit vote.

Mike Cherry, national chairman at the UK's Federation of Small Businesses (FSB), said the news is "deeply concerning to small firms."

"Small business confidence is already at a four-year low. Firms are less optimistic, cutting headcount and curbing investment intentions."

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