The Bank of England meets today to discuss interest rates. Two-thirds of investors fear they will cross into negative territory this year, new research reveals, and few are clear about the impact on portfolios.

Ahead of a meeting today when the Bank of England will discuss the prospect of negative interest rates, a new survey reveals that two-thirds of UK investors fear this as an outcome in 2021 and over half (55 per cent) are unclear about the effects negative rates will have on portfolios.

Research commissioned in mid-January by trading house HYCM also found that only half of roughly 900 UK-based investors (holding £10,000-plus outside property and pensions), were confident that financial markets would fully recover this year from the pandemic.

Recent comments from the Bank of England’s Monetary Policy Committee (MPC) have suggested that negative interest rates could be part of the toolkit for 2021 to help boost economic growth.

Notes from today's meeting will be picked over for clues as to when the current 0.1 per cent rate will duck into negative territory and what that means for markets. The MPC has chipped away at the rate, which stood at 0.75 per cent last January. For some background, rates were between 4 to 6 per cent before the financial crisis in 2008/2009, and tumbled to below 2 per cent shortly thereafter.

The Swiss have been dealing with negative interest rates for more than five years and the central bank has little appetite for changing the situation while their primary interest is keeping the Swiss Franc stable as a safe-haven currency. However, financial institutions have felt the pain. They spent around SFr2 billion in 2019 to pay the negative interest on deposits with the SNB. It has raised the question of how they can recoup these costs; charging negative interest on their own customer accounts is one method. But apart from doing this for large deposits, Swiss banks have mostly made up losses by raising management fees.

In the UK's case, “More clarity is needed as to whether the Bank of England will need to use negative interest rates, especially now there has been a positive Brexit deal for the UK at the start of 2021,” Giles Coghlan, chief currency analyst at HYCM, said.

“For now, we know that Governor Andrew Bailey wants negative interest rates to remain part of the bank’s ‘tool kit’. Whether they will be deployed is another matter."

The UK economy was projected to grow by 4 per cent in the final quarter of 2020 before another wave of lockdowns was imposed.  As a result, it is now expected to shrink by 2 per cent. Last year the economy contracted by around 11 per cent. In the last policy meeting, Bailey said that a return to pre-COVID growth wouldn't happen until 2022.

Should investors be worried about negative rates this year?

“My short answer is no,” Coghlan said. They could affect rates linked to mortgages, credit cards and personal loans, he said, but retail investors should be shielded by their banks and “not expect to pay interest on the cash in savings accounts." His reasoning is that this "has not happened in Switzerland" where negative interest rates currently stand at -0.75 per cent.

The analyst said he was more interested to see how the pound and FTSE would react to such an announcement and whether this might lead to new investment opportunities. “Certainly, a walking back from the use of negative interest rates creates opportunities for short term GBP strength at the very least.”