When the Bank of England slashed interest rates down to 0.1% in March, a few people started to think about the possibility of negative interest rates. This was still the minority though — after all, the UK has never actually had negative rates. Yet over the past month or so, there’s been growing chatter about the Bank of England putting the rate below zero. The Bank has said such a policy is “under active review“. The bond market (often seen as the market perception of where rates should be) saw government debt trading below a zero yield last month for some maturities.
So given that there’s a genuine possibility that we could see negative interest rates by the end of this year, it’s time to prepare my investments for it!
Cash is not king with negative interest rates
Forget what you heard about the merits of holding excess cash in your account. Sure, you need cash to cover expenses and to have a buffer for any unexpected costs. But any surplus cash sitting within a savings account or elsewhere could be under threat of losing you money. It’s already losing you money in theory, as the interest rate you’re getting is most likely lower than the inflation rate. This means the true value of the money is being eroded. Yet if interest rates go negative and the banks pass on this cost to consumers, you could be charged for holding cash on account.
To prepare for this, I’m looking at what excess cash I can do without, and looking to invest it in defensive stocks. These stocks typically have low volatility and shouldn’t perform too badly even if we see a second stock market crash this summer. I’m not trying to double my money here, just find a safe home for it.
Seek income from dividends
Negative rates will also be passed on via lower payouts from investments such as Premium Bonds and Cash ISAs. So for investors who use cash to generate passive income, this won’t be viable any more. Instead, I’d be looking for reputable FTSE 100 dividend-paying stocks to fill this void. You don’t have to look for high-yield stocks, as sometimes this carries a high risk to it. For example, Diageo is a large, well established firm. It’s still paying out dividends, with a yield of around 2.4%. Now this isn’t huge, but in comparison to a negative interest rate, it’s very good!
Look for long-term homes
If interest rates do go negative, it may be some time before they come back to positive territory. When they do, they will likely still be below 0.5%. So for some funds, look to high-growth stocks that you can hold and benefit from for the long term. Good examples here are firms like JD Sports and Flutter Entertainment. This allows you to not only avoid the rates issue, but also to be comfortable in not worrying about interest rates for several years. It’s unlikely you’ll get much income from these stocks, but the capital growth could be very large!