Could Negative Interest Rates Boost Flagging Construction Sectors?

19 February, 2021

As countries around the globe are working to get control of coronavirus infections and roll-out vaccination programmes, thoughts also turn to how to get struggling economies back on their feet.

For many countries such as the USA and the UK, interest rates plummeted to around zero at the start of the pandemic but have so far held off on taking the plunge any further.  However, there are signs that central banks across the globe are considering introducing negative base interest rates as a way of stimulating economies beleaguered by the effects of the pandemic.

Negative interest rates have been implemented by a number of countries in the last decade, including Japan and some European countries in response to the financial crisis of 2008, which also saw interest rates in other countries such as the UK and US reach the lowest rates in years.  Whilst central banks have lauded the benefits of such a move, the counterargument has been that in the long term, negative interest rates reduce the power of banks and punish savers.

In the US, whilst the Federal Reserve slashed interest rates to around zero in response to the pandemic, rates have not dropped into negative numbers as yet.  Instead, it has focussed on lending programmes and bond purchases.

In late 2020, the UK’s banks were contacted by the CEO of the Bank of England to ascertain their readiness for the introduction of a zero or negative interest rate.

Whilst this letter was not a statement of intent, it does highlight the fact that with interest rates currently at a record low of 0.01%, the UK’s central bank is running out of options as it looks to mitigate the economic effects of the coronavirus pandemic.

The situation in Australia seems to mirror that of the UK, with interest rates hitting a record low of 0.1% in November 2020, the Royal Bank of Australia’s current position is that it would be highly unlikely that rates would fall to below zero in the current climate.

 

Construction – the Potential Impact

By dropping the base interest rates to below zero, central banks are effectively paying other banks to borrow money, or charging them to save, thus in theory encouraging spending.

Whilst it is up to the high street banks to decide whether or not they pass on these rewards or penalties to their customers, there is a chance in the near future that businesses could be charged interest on their savings, rather than being paid for them.

Potentially, this could encourage developers in struggling sectors such as commercial office space and hospitality to look at investing in construction projects to ensure that their money is being put to good use instead of reducing slowly in the bank.

Construction has been one of the hardest hit sectors by the pandemic, and whilst productivity levels had increased by the end of 2020, the current lockdown has seen yet another reduction in activity.  Whilst negative interest rates may seem like a risky move to some, if there is a potential to stimulate activity in some of the hardest hit sectors and increase investment in construction projects, then perhaps it is a risk worth taking.