Neil Collins’ Notebook – Oh please, not negative interest rates

The Bank of England denies it, but we are being softened up for negative interest rates. This Alice-in-Wonderland concept, where savers pay someone else to look after their cash, betrays how desperate the bankers are to try and revive our crashed economy. It cannot be said too often that this really is a very bad idea.

Negative interest rates are well established in Switzerland, for example. They are used to discourage foreigners from fleeing to a safe currency haven, and they were imposed to try and stop the Swiss franc from rising so far that it threatened domestic manufacturers. This is not the problem the UK faces.

Bank Rate has already been cut to a smidgeon above zero – a rate that would earn just £1,000 on a deposit of a million for a year. The idea that investment committees which are not investing at these rates would suddenly rush out and spend the money rather than pay a bank to look after it is self-evidently absurd.

As for individual savers, the BoE has sense enough to see that it would make the banks even more unpopular with customers who are addicted to free-in-credit banking. This is a hangover from the days when cash earned a return, and ever since it stopped doing so, the banks have been trying to work out how to end it. Should one of the big four start to charge for current accounts, its retail deposits would drain away. Should the others follow in short order, we would suspect collusion, and we would be right.

Rather than pay charges, we would suddenly have a renewed appetite for cash. Conveniently, the new plastic notes take up almost no space and, unlike the old paper ones, do not rot if buried in a box in the garden. If enough of us did this, the impact of negative rates would be to reduce, rather than increase, the velocity of money circulating in the economy, while leaving the banks with less to lend. This is not the route to economic recovery.

It irks to feel pity for the big banks, but they face more misery almost whatever happens. They will have to pursue the billions in bad or fraudulent loans which the government has guaranteed in the great lockdown panic. The difference between their cost of money and what they can earn without risk, the so-called net interest margin, is already wafer-thin.

The banks may be economically vital, but they might wonder what’s in it for their impoverished shareholders. Barred from paying dividends this year, they are effectively being run as a branch of social services, which is why at 27p Lloyds Banking shares are lower than they were in the depths of the banking crisis.

At less than half the value of their tangible assets, all the big banks are theoretically worth more dead than alive. In other words, should Lloyds, Natwest or Barclays signal that they were liquidating the business and returning the assets to the owners, the share prices would leap. In practice, the government would find a way to stop it, but the threat might concentrate official minds. Such a thought should ensure that they rule out negative interest rates. Oh, and dividends should be set by bank boards, not by official diktat.

Vanity project on track (well, nearly)

Some poor sap called Andrew Stephenson MP has the unenviable task of putting lipstick on the pig that is HS2. From his trough of the Department for Transport, the first of the promised six-monthly reviews of this benighted project emerged this week.

Mr Stephenson has done his best to seem upbeat, but it is clear that this vast vanity project is going to cause endless political misery. The cost – sorry, “funding envelope” – is still £44.6bn for getting to Birmingham, and between £72bn and £98bn for reaching Manchester and the north. Yet even in the brief period since the prime minister’s decision to build, build, build, the costs have gone up again.

“HS2 is currently reporting cost pressures of £0.8bn” explains Mr Stephenson, in the deathless prose of DaFT, while softening us up for worse news (thank you, Covid, for providing useful cover) on buildings on the route which contain unexpected asbestos, or the expense in knocking Euston station about.

Assuming he is not reshuffled to some more agreeable position, poor Mr Stephenson must produce one of these reports every six months. Still, if you want a lesson in obfuscation disguised as clarity, take a look.

It’s an oil company, stupid

On August 10 this year, the board of BP revealed its exciting new strategy to go “from international oil company to integrated energy company” with a “decade of delivery towards net zero ambition.” The “reset” (ie cut) dividend was “resilient” and the prospect was of 7 to 9 per cent growth in gross earnings until 2025. The shares were 302p.

The analysts were appalled. The numbers in the endlessly detailed presentation added up to little more than a green wish list. In the ensuing 10 weeks the BP share price has fallen by a third, more or less in a straight line, to today’s 208p, their worst for 26 years.

Perhaps it was the thought that BP has had these warm and fashionable thoughts before, with the previous management’s “Beyond Petroleum” or perhaps it is the growing realisation that new energy is difficult, expensive, and with no guarantee that Big Oil is going to be any good at it.

BP, like Royal Dutch Shell, is an oil (and gas) company. This is where their assets and expertise lie. The world will need lots of both for decades to come, and these two can provide it cheaply. They should pay out the profits and let the shareholders decide where to invest them.