Yesterday, the Bank of England had its usual monthly meeting. It lifted the forecasts for the UK economy for next year, which is a good sign. However, there was still chatter concerning negative interest rates. Governor Bailey said the banks would be given six months notice if it decided to go ahead with negative rates. In recent months, there’s been more talk within the Bank about taking rates below the current level of 0.1% to zero or even further.Â
This isn’t unheard of. Europe has put up with negative rates for several years now, as have Japan. If it did happen in the UK later this year, I need to start getting ready for it now!
Putting money to work
The first way I’m looking to counter the impact of negative interest rates is by reducing my cash balances. Obviously, I need cash for general expenses and liquidity. But for the cash funds that are from stocks I’ve recently sold, or dividend income, I could look to re-invest it. This could be topping up my existing stock investments.
It’s sensible to have a rainy-day fund, so alternatives such as short-term time deposits or liquid investment funds is another idea. This is because negative interest rates could be passed on to retail customers like myself. This is a only a potential outcome, as banks may not pass on the charge to customers if they fear losing them altogether!Â
The second way I want to beat negative interest rates is by making sure my money gets me a positive return overall. I’m going to have some cash that could be costing me -0.1% or more. So to balance this out, I want to steer more funds into FTSE 100 dividend stocks. This will enable me to earn a positive yield, offsetting the negative costs.
Given that the FTSE 100 average dividend yield is 2.85%, I’m not too worried about making a positive return overall. Even a modest amount invested into dividend stocks would cover the costs of the cash I’m holding.Â
Implications of negative interest rates
The final way I’m going to try and beat negative interest rates is by targeting new areas for investment. For example, the impact of negative rates could help to boost the price of gold. This is because the opportunity cost of buying gold (that pays no interest) is smaller. So I could look to buy into mining companies to benefit from this.
Another option might be buying into REITs. These real-estate investment trusts should benefit from lower rates as well. The cost of mortgages and general borrowing could go down. This would help to boost the property yield, and thus boost the share price of the REITs that are publicly traded.
Not all businesses would benefit from the implications of negative interest rates, so I need to be careful. Banks would be one likely loser in this situation. Money earned from deposits would shrink, as well as the margin made on loans.
Overall, negative interest rates doesn’t have to impact my stock portfolio badly if I’m prepared. I can ensure I’m ready by topping up my existing investments and looking for dividend income. Finally, if the time does come when rates are cut, I can target specific FTSE 100 stocks to take advantage.