The FT is reporting that Royal Bank of Scotland will be imposing negative interest rates on some institutional customers for holding cash on deposit from Monday.

The institutions affected would appear to be those which use RBS for investment banking services. This probably includes firms who use the bank to trade on derivatives markets, either to hedge their exposure to certain assets, or as part of an investment management strategy. There is no suggestion negative rates are on the cards for personal customers, though households do currently hold £163 billion in cash accounts which pay no interest whatsoever. 

Laith Khalaf, Senior Analyst, Hargreaves Lansdown: ‘We are venturing through the looking glass when it comes to interest rates, where individuals and institutions are basically being pushed up the risk spectrum by central banks. That’s likely to inflate asset prices further as investors seek some measure of return on their capital, though it does beg the question of what happens when the merry-go-round starts spinning in the opposite direction. The move by RBS reported today would appear to only affect a relatively limited number of investment banking clients. We are still a long way from banks imposing negative interest rates on personal customers, which would be a deeply unpopular move, though clearly the direction of travel is concerning for savers. 

Banks now have access to a line of cheap funding from the Bank of England, which means they are less reliant on deposits from customers. We have already seen a spate of interest rate cuts for savers, most notably from Santander, and there are no doubt more in store.

The outlook for cash looks bleak for the foresseable future, which is bad news for anyone saving money for short term goals like a deposit for a house. Longer term savers need to consider whether to stick with cash and accept their savings may be falling behind inflation, or take on the volatility of the stock market in search of better returns.’