It emerged yesterday the Bank of England (BoE) is getting closer to taking the Bank Rate below zero. And I reckon that’s yet another reason to look towards investing in UK shares.
The Bank Rate determines the rate of interest which the BoE pays to commercial banks when they deposit money at the central bank. And, therefore, the Bank Rate influences the rates banks, such as Barclays, Lloyds, and NatWest, charge people to borrow money or pay on their savings.
Negative rates have already happened in other parts of the world. For example, central banks in the eurozone and Japan have already walked the dark side into negative rates. But, for the UK, this is something new. Although the BoE appears to have been chewing over the possibility for some time since the pandemic hit.
Why I’d choose UK shares
According to Reuters, the BoE said on Thursday it would “begin structured engagement on the operational considerations in 2020 Q4.” The central bank must find a way to move the interest rate below zero without damaging the ability of banks in the UK to lend money to businesses and individuals.
If banks can’t lend money easily, it could damage the economic recovery in Britain. But the BoE is trying to stimulate the recovery, so it’s quite a difficult balancing act.
Whether negative interest rates will happen or not, we can’t be sure. And it probably depends on whether Covid-19 and other factors cause the UK economy to weaken further.
But what does all this mean for investing? The first thing that seems certain is cash bank accounts will not be paying decent interest rates any time soon. And the problem with ultra-low, or even zero interest rates in a cash account is that, over time, the spending power of our money could decline. Indeed, inflation will likely cause the cost of things to rise and our saved money won’t be able to keep up.
So, I’d look for alternative places to keep my money. And the number one choice for me is to invest in UK shares on the stock market. Indeed, studies have shown that over the long haul, shares as a class of asset have outperformed all other major assets such as cash savings, bonds, and property. I think shares will continue to outperform in the years ahead, even if we do see a negative Bank Rate.
And there are good reasons for such optimism. Underlying every share is a company with a real business. And businesses can be adaptable to changing economic circumstances. For example, they can increase their selling prices to cope with inflation. And that means they have the potential to maintain their profits.
But businesses can increase their earnings, expand their operations and build value by increasing their assets. And such dynamic abilities can work to give shareholders like us a good return over time. We could see a rising share price, which would cause our invested capital to rise in value. And we can also expect income from shareholder dividends in many cases.
I reckon investing in shares and share-backed vehicles such as funds is a good way to overcome the negatives of the ultra-low interest rate environment we have now.
I'd start with these:
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.