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What do negative interest rates mean for savers and mortgage holders?

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what do negative interest rates mean for savers and mortgage holders

Britain’s savers could soon be charged to hold money with their banks after the Bank of England left itself wide open to setting interest rates negative for the first time.

The Bank of England base rate of interest, which influences how cheaply banks can borrow money, what homeowners pay for their mortgage and how much savers earn on their savings, was held at its historic low of 0.1 per cent yesterday.

But experts are now warning a negative base rate looks plausible if the economy stalls in the face of soaring unemployment or a second wave of Covid.

If the Bank of England moved to push rates into the red, then commercial banks would have to pay to hold cash deposits with them, making it likely most if not all would pass on these costs to savers. 

On the flipside, those on variable rate mortgages that are linked to the base rate could see the unusual scenario of their bank technically obliged to pay them interest on their homeloans. 

In practice, however, history suggests that negative rates tend only to be passed on to savers, while mortgage borrowers see no benefit. 

In the aftermath of the credit crunch, this was the case for a small number of mortgage borrowers, who simply didn’t have to pay interest at all.  

The increasingly real prospect of negative rates will come as a further blow to the country’s hard-pressed savers, who have already had to endure a decade of low interest rates, and could soon see their savings eroded even further. 

The country's hard-pressed savers could soon see their savings eroded even further

The country's hard-pressed savers could soon see their savings eroded even further

 The country’s hard-pressed savers could soon see their savings eroded even further

Challenger bank Starling has already dropped its interest rates for personal account customers below zero this week, though only for those who hold high balances in euros.

This is because the European Central Bank has had a policy of negative interest rates since 2014 but cut rates from -0.4 per cent to -0.5 per cent last year.  

Kevin Brown, savings specialist at Scottish Friendly, said: ‘The prospect of the Bank of England coming to the rescue of the nation’s hard pressed savers remains a long way off, with today’s announcement possibly paving the way for negative interest rates in the coming months.

‘Although the steep drop in inflation in August means there is temporarily more choice for savers looking for inflation-beating returns, this period is likely to be short lived. 

‘The cash savings market in the UK is beyond repair while the prospects for the UK economy remain so uncertain.’

What would it mean for savers and borrowers?

The economy grew by 6.6 per cent in July, which experts said puts the economy on track for a double-digit bounce-back from recession.

But worries are mounting over mass unemployment and long-term economic scarring following the pandemic once Government support schemes end.  

If the economy starts shrinking again, in theory negative interest rates would stimulate more spending by encouraging banks to get money out of the door to businesses and consumers to spend, rather than save.  

Bank Governor Andrew Bailey said recently he expects the pandemic to permanently scar the economy by reducing GDP by 1.5 per cent

Bank Governor Andrew Bailey said recently he expects the pandemic to permanently scar the economy by reducing GDP by 1.5 per cent

Bank Governor Andrew Bailey said recently he expects the pandemic to permanently scar the economy by reducing GDP by 1.5 per cent

It may also mean borrowing – for example taking out a mortgage – will become cheaper.

Central banks in Denmark and Switzerland have already set interest rates below zero, with Denmark’s third-largest lender Jyske Bank hitting the headlines last year after launching a mortgage with a rate of -0.5 per cent, the world’s cheapest.

This meant the amount a borrower owed the bank reduced each month because it deducted rather than charged interest. It wasn’t free money though, as the bank still profited from fees and charges.

There is also no guarantee that all banks would pass on the benefit in the same way, and lenders are usually slow to pass on interest rate cuts to borrowers. 

They are also already operating on very slim margins and a further base rate cut would give them even less room for manoeuvre on pricing new mortgage products. 

Mortgage holders already on variable rates should mostly start saving money every time interest rates are cut. Whether UK lenders would follow Jyske Bank in launching negative mortgage rates remains to be seen.

The opposite is true for savers – banks could pass sub-zero interest rates onto customers by charging them to hold their deposits.

All nine members of the MPC voted to leave rates unchanged and keep its quantitative easing programme to boost the economy at £745billion

All nine members of the MPC voted to leave rates unchanged and keep its quantitative easing programme to boost the economy at £745billion

All nine members of the MPC voted to leave rates unchanged and keep its quantitative easing programme to boost the economy at £745billion

Rachel Winter of Killik & Co, said: ‘The rumours of negative interest rates continue to rumble on but, in welcome news for UK savers, they are yet to become a reality. 

‘However, there remains the prospect of significant job losses when the furlough scheme comes to end next month which will inevitably put further pressure on household finances, so the possibility of lower rates in future cannot be ruled out. 

‘As we have seen over the past decade, lower interest rates can have the effect of enticing more savers into the stock market as they seek to earn a return on their savings.’ 

While Britain’s biggest banks pay everyday savers as little as £1 on every £10,000 of savings already, costing them money in real terms after inflation, actually penalising them for holding their money would be unprecedented.

Inflation remained well below the Bank’s 2 per cent target in August – plunging to just 0.2 per cent – meaning there is no official case at the moment for an increase in rates. 

However, many believe the Bank of England could implement further action later this year, likely in the shape of more bond-buying in November or December to prevent the economic rebound from fizzling out.   

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The Very Group shipping million parcels a week for Christmas

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the very group shipping million parcels a week for christmas

Standing in a giant warehouse on a grey October morning somewhere in the Midlands, it’s impossible to escape the uncomfortable feeling that Christmas won’t be very merry for shops this year. 

From here, Henry Birch – chief executive of £2billion online retail giant The Very Group – is already shipping out a million parcels a week. 

By the week of Black Friday at the end of November, that number will increase to 1.5million packed and loaded by more than 800 staff and 500 brand new robots – machines specifically designed to slash costs and cut the time it takes to get orders out of the door. 

While the ring of high street tills feels increasingly hollow, Birch can say with unflinching certainty that he’s ready for his biggest festive season yet. 

Sales at his Very.co.uk website rose 36 per cent in the three months to the end of June and demand has continued in ‘double digits’ since. 

'Tough call': Henry Birch pressed on with the plan to set up one huge site

'Tough call': Henry Birch pressed on with the plan to set up one huge site

‘Tough call’: Henry Birch pressed on with the plan to set up one huge site

‘We see the strong trading continuing. We’re going into this with momentum and from a position of confidence. Our feeling is that we are going to have a record Black Friday and Christmas – stronger than we’ve ever had before.’ 

Many online firms are already calling it ‘Black November’ – a month of discounts and incentives for shoppers to buy early but, more critically, online. 

Birch explains – for obvious reasons – that ‘consumer sentiment seems to be around staying away from the high street and shopping online’. 

The smooth running of the warehouse is clearly bolstering that confidence. It was scheduled to go operational on the day Prime Minister Boris Johnson announced lockdown on March 23. The Very Group pushed ahead with the plan – beginning from a standing start meant it was easier to assimilate Covid-19 safety measures than at some rival operations – consolidating two existing warehouses in the North West to this one. 

‘We had a tough call to make and we made a decision to go ahead,’ says Birch, whose group also owns the Littlewoods brand. 

‘It was the right thing to do in retrospect. We’ve seen a huge sales growth since March and that’s been underpinned by having this place fully operational,’ he says. 

Skygate, as the 850,000 sq ft warehouse is known, is the company’s shop floor, while the Very website is its shop window. It is strategically placed in the middle of the country, buttressed by East Midlands Airport on one side and the M1 motorway on the other. 

Rail links, vastly improved efficiencies and its central location mean it has cut about a million miles from its transport budget. And, Birch is quick to point out, it has cut carbon emissions too. 

Birch says the company – founded by Merseyside businessman and Littlewoods catalogue creator John Moores, after whom Liverpool’s second university is named – is absolutely ’embedded’ in Liverpool where its head office remains, adding that being in the region is a ‘competitive advantage’ with so many other online firms there. But the retreat from Shaw in Oldham and Little Hulton near Manchester was a painful one, described by one commentator on its announcement as ‘another dark day’ in UK retail but which insiders say was dealt with as sensitively as possible given the circumstances. 

34794228 8875159 image m 277 1603563446553

34794228 8875159 image m 277 1603563446553

Birch, a diplomat’s son who previously ran William Hill’s online gambling business, acknowledges the sophisticated warehouse means he needs to employ around 1,000 fewer staff. The robots that have replaced the product pickers resemble kids’ ride-on sports cars – complete with neon headlights. 

But the company sees automation as the key to success in an arms race in which smaller – or weaker – players in retail will increasingly struggle to compete. 

In the warehouse is a machine that packs up 1,500 items an hour, with more to come following its initial success, and huge conveyor belts that pre-sort parcels rather than leaving the job to distribution firms on the outside. 

‘We can go from receiving an order to getting it out of the door in 30 minutes. The speed of getting things in and out of here is impressive,’ he observes as we walk across the highest mezzanine. Previously, the process took four hours. 

As a result of that, The Very Group will seek to dispatch orders immediately rather than, as many firms do on Black Friday, pushing out delivery promises by a week or more – a delay tactic that is employed in a desperate effort not to turn away trade during such unprecedented demand.

34794230 8875159 image m 279 1603563470059

34794230 8875159 image m 279 1603563470059

During lockdown, demand changed significantly. Very was shipping out 300 jacuzzis and spas each day at the peak of lockdown, dispatching them as quickly as they arrived in the warehouse, and fashion sales fell even though Birch says he managed to increase market share. 

He adds some hope for clobbered fashion retailers: ‘We’re definitely seeing a recovery in fashion – whether people will decide that finally they want to treat themselves for Christmas Day or whenever they can meaningfully go out after that.’ 

But he says its ‘harder to call’ overall consumer spending beyond the further shift online.

‘Anecdotally, I think people are going to want to celebrate Christmas, treat their kids, and have something to look forward to. I think it feels like it will be a normal Christmas, if not a better Christmas in terms of overall trading. 

‘I just think people are going to take more time planning and buying for Christmas this year. They’re going out less, sitting at home online. I think people have got more time on their hands. 

‘They want something to look forward to and at the moment Christmas is something of a light at the end of the tunnel.’ 

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TONY HETHERINGTON: We can’t get our wedding deposit back

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tony hetherington we cant get our wedding deposit back

Tony Hetherington is Financial Mail on Sunday’s ace investigator, fighting readers corners, revealing the truth that lies behind closed doors and winning victories for those who have been left out-of-pocket. Find out how to contact him below. 

Ms A.H. writes: My partner and I booked a wedding reception for 60 guests at Pembroke Lodge in Richmond Park, for July 11. 

The Government restrictions to tackle the pandemic meant this could not go ahead as planned. Pembroke Lodge set a cut-off date for us to decide whether to go ahead, but could not say whether they could provide our wedding at all, let alone how many guests would be allowed. 

We could not continue, so we asked for a refund of our £1,750 deposit, but they refused. 

Cancelled: But Pembroke Lodge in London¿s Richmond Park would not offer a refund of Ms H¿s £1,750 deposit

Cancelled: But Pembroke Lodge in London¿s Richmond Park would not offer a refund of Ms H¿s £1,750 deposit

Cancelled: But Pembroke Lodge in London’s Richmond Park would not offer a refund of Ms H’s £1,750 deposit

You told me that your wedding had been planned for more than a year, with one of the attractions that the reception would be in one of the Royal Parks, in South West London. 

As lockdown restrictions were announced and changed, you were pressed for a decision by June 13, though the management at Pembroke Lodge could still not say what would be allowed or how many guests you could have. 

As your church ceremony was still allowed, you went ahead with that but cancelled the reception and requested a refund. You were offered instead a choice that included postponing your reception until a new date at some point in the future, with Pembroke Lodge adding that its terms and conditions allow no refunds. 

However, when I looked into those terms and conditions, they showed that you and your partner had made the booking, but they did not show who was on the other end of the contract, nor did the wedding firm’s 31-page brochure, or its very attractive website. 

Pembroke Lodge is just a building, not a person or a company. It turned out that the wedding business is operated by a company called The Hearsum Family Limited, headed by chartered surveyor Daniel Hearsum. So I asked him why he expected payment and confirmation of the booking in June, when from his side, he was unable to say whether he could provide any reception at all, and clearly could not offer a reception of the size you had booked a year earlier. He explained that he had withdrawn the original deadline for your decision, but regarded his terms and conditions as a binding contract. I could quibble over this, as the contract fails to name his company, but the more important bottom line was that he could not provide the 60-person reception you had booked. This was not his fault, but nor was it yours, of course. 

And while this toing and froing was going on, the Competition and Markets Authority had been doing sterling work on the subject of wedding bookings, using a 1943 law about ‘frustrated contracts’ which could not be carried out – in this case, because lockdown laws made the booking impossible. 

The CMA investigated one particular wedding firm and allowed it to hang on to certain expenses it had already had to meet, but emphasised that the starting point was that couples were entitled to a full refund, even if the terms and conditions said otherwise. 

This was an impressively fast and fair piece of work from the CMA, but unfortunately a different wedding firm then told lots of others that the CMA had set a ‘benchmark’ allowing them to keep 37 per cent of the original full price, minus an allowance for the time since lockdown began. And Daniel Hearsum cheerfully told me that this meant he could keep the whole £1,750, though he added that ‘we will offer a goodwill refund of £750, if that is an amicable end of the matter’. 

The CMA was startled to be told by me that its boss Andrea Coscelli had supposedly set a firm benchmark allowing wedding firms to keep a fixed percentage of deposits without having to provide a reception. This was completely false, officials insisted, adding, ‘This is not a benchmark. We have never used the word benchmark, and there is no benchmark.’

In a nutshell, wedding firms have to justify keeping a single penny, by showing they have forked out – for example – for such things as flowers, cars, catering staff, food, and so on. Pembroke Lodge management have come up with no figures, saying only that, ‘Between June 2019 and June 2020 we worked hard to prepare and plan for A’s wedding.’ 

They claim: ‘We offered to bear 80 per cent (some £6,500) of the cancellation losses.’ But there is no breakdown of this sum, and nothing to show what Pembroke Lodge might or might not already have spent. 

The outcome is that there is on the table a ‘goodwill refund’ of £750, leaving you £1,000 out of pocket. Only you can decide whether to make the best of a bad job. But I am sure other couples will form their own view, and I suspect it will be closer to the CMA’s wise starting point that if a company can’t do the job, then the customer is entitled to a full refund. 

Will Sainsbury’s refund my card bill? 

E.B. writes: Please help me. I am 80 years old and in poor health, and I cannot get Sainsbury’s Bank to give me a refund. 

The amounts in dispute are £375 and £762, both paid to Fleetway Travel on my Sainsbury’s card.

In each case, Sainsbury’s has told me it has asked Fleetway for a refund, which implies that Sainsbury’s is unaware that Fleetway has ceased trading. 

Money back: Mr B has now received his refund, and a gesture of goodwill as it did take a little longer than usual

Money back: Mr B has now received his refund, and a gesture of goodwill as it did take a little longer than usual

Money back: Mr B has now received his refund, and a gesture of goodwill as it did take a little longer than usual

Fleetway Travel fell into administration in July. 

It did have cash in the bank and other assets worth several million pounds in total, but nothing like enough to pay off the roughly £11 million owed to ordinary customers. 

When a business ceases trading, card issuers have to go through a chargeback process. Under rules set by Mastercard, the business is allowed 45 days to object to the claim, though Sainsbury’s did in fact go past this. 

A spokesman told me you had been reassured that you would not be liable for the money – or for any interest charged – and added: ‘Mr B has now received his refund, and a gesture of goodwill as it did take a little longer than usual.’

If you believe you are the victim of financial wrongdoing, write to Tony Hetherington at Financial Mail, 2 Derry Street, London W8 5TS or email tony.hetherington@mailonsunday.co.uk. Because of the high volume of enquiries, personal replies cannot be given. Please send only copies of original documents, which we regret cannot be returned. 

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JEFF PRESTRIDGE: Neil Woodford must be held to account

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jeff prestridge neil woodford must be held to account

Financial justice is rarely swift in this country. The wheels turn excruciatingly slowly and examples of judicial or regulatory procrastination are aplenty. Unfair? Of course. But sadly it seems the wheels will not be speeding up in the near future. 

It took 11 years for customers of Equitable Life to receive compensation after the insurer nearly collapsed, causing their policies to plunge in value. 

Twenty years on from that near meltdown, investors are still valiantly demanding more – £4billion (the amount they lost) instead of the £1.4billion that has so far been handed out by the Government. 

Unfair: Neil Woodford has retreated to his multi-million pound home in the Cotswolds to enjoy the good life

Unfair: Neil Woodford has retreated to his multi-million pound home in the Cotswolds to enjoy the good life

Unfair: Neil Woodford has retreated to his multi-million pound home in the Cotswolds to enjoy the good life

I wish them well although I don’t hold out much hope for them in these challenging times. 

Victims of banking malpractice in the run-up to the 2008 financial crisis, and its aftermath, are also still fighting for justice with class actions before the courts. A chance of victory is on the horizon, but no more. Legal hurdles need to be cleared and courts to be convinced. 

It also seems that those who lost money in the mismanagement of investment fund Woodford Equity Income – some up to 50 per cent of the value of their original investment – will have to wait quite a while for financial justice to be served. 

Litigation specialists are edging closer to mounting group class actions against companies involved in the fund debacle – namely Woodford’s supervisor Link and wealth manager Hargreaves Lansdown which aggressively promoted the fund right up until it was closed in June last year. 

Harcus Parker appears to be leading the charge with a claim likely to be issued – hiccups notwithstanding – against Link before the year is out. 

But when it presses the green button, success is not guaranteed – and only those investors who support the claim will take a slice of any spoils. It could be another two years before we get to such a position. Frustrating for aggrieved investors of which there are plenty.  

Of course, justice could come sooner if the financial regulator does the job it is paid to do – which is to protect consumers and secure redress for them when they have been victims of financial wrongdoing. Indeed, it would remove the need for any of the class actions. For the past 17 months, it has been investigating the events leading up to the fund’s closure, but it has yet to pronounce on what it intends to do. All it would say last week was that its probe is a ‘priority matter’. 

Unlike the litigation, the Financial Conduct Authority’s focus is not just on Link or Hargreaves Lansdown. It is also looking at the role of Neil Woodford in the fund’s suspension and ultimate demise – and in particular the game of Russian Roulette he played with investors’ money by investing it in a toxic mix of unquoted and illiquid stocks. 

So far, Woodford has not been held to account. Bankrolled by the millions of pounds he earnt from the failed fund – outrageously, a chunk of it while it was suspended – he has retreated to his multi-million pound home in the Cotswolds to enjoy the good life.

He’s even been touting for business in China, although coronavirus seems to have put that project on hold. 

While most Woodford Equity Income investors I speak to want financial justice – delivered either through the courts or via the regulator – they also believe Woodford must carry the can. I agree. 

The regulator’s findings cannot be published soon enough – investors deserve nothing less. 

And when they see the light of day, they must pack a punch that Muhammad Ali would have been proud of. That means financial redress for investors and enforcement action against those responsible for one of the biggest investment fund debacles of recent times. 

…………………………………………………………………………………………………………………….. 

Through their high street presence, post offices generate £1.1billion of revenue for local businesses – as customers use their trip to town to have a coffee or a meal, or use other services. 

As the Post Office says, it is an ‘anchor’ of the high street. 

So why can banks – an equally vital local service – be allowed to shut their branches at a rate quicker than confetti falls at a wedding – without any form of accountability? 

Their presence has a similar galvanising effect on the high street. Do email me if you have any thoughts on this.

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