Negative interest - could there be any positives if rates go sub zero?

Australians aren’t used to negatives, in a lot of respects at least. The temperature is usually comfortably (or uncomfortably at times) above zero, and the positive “she’ll be right” attitude is a stereotypically Aussie trait.

Looking at our economy over the last few decades, minuses haven’t been commonplace either. In 2008, when much of the world was hit with a period of economic recession, Australia bucked the trend and continued to post largely positive numbers. 

But could we now be heading for a pretty significant negative – in interest rates? And if there are negative interest rates on the horizon, what could that mean for consumers?

What are negative interest rates?

Negative interest rates happen when the rates that financial institutions apply to people borrowing money or putting it in savings fall below zero. Interest rates are usually positive, meaning people earn interest on their savings and have to pay it when they borrow. But with negative interest rates, the opposite can happen. 

Given how used we’ve become to how interest usually works here, negative rates would seem like the financial equivalent of water flowing up a hill, the sun rising at nighttime or a white Christmas in Darwin. 

In general, it’s very rare for banks to apply negative interest rates to consumer products like savings accounts or home loans. Indeed, the Canstar database, which stretches back more than two decades, has never seen negative rates on these products. 

But it’s not unheard of for national central banks, like the Reserve Bank of Australia (RBA), to set a negative cash rate. This means that the central bank would likely charge retail banks (the ones consumers use) to keep money on deposit with them. 

One of the reasons a central bank might take this approach is to encourage these retail banks to lend money to consumers and businesses, instead of leaving that money on deposit and being charged interest.

In turn, retail banks typically pass on the interest rate decreases to their customers, theoretically encouraging them to borrow and discouraging them from keeping their money on deposit in savings accounts or term deposits.

What’s the ultimate aim of all this? As the RBA puts it, “a reduction in the cash rate typically stimulates spending and inflation”.

However, Professor Michael O’Neil, Executive Director of the South Australian Centre for Economic Studies, explains that consumers and businesses don’t necessarily go on spending splurges because interest rates are low or negative. 

“What people and businesses are likely to do is hoard money,” he told Canstar. “Businesses are going to stop investing which could have a negative effect on employment as well as spending. People are also likely to use any excess funds that they have to run down debt, like a mortgage, rather than try to invest it in a bank or anywhere that’s going to provide a negative interest rate.”

What causes negative interest rates?

Negative interest rates are traditionally introduced to try and help revive a slow economy. If a country’s economy is experiencing low or negative growth, unemployment is too high, wages aren’t going up, people aren’t spending money and prices aren’t increasing (or in other words if inflation is too low), a central bank may take steps to bring down interest rates. The idea would be to give the economy a jump- start by encouraging consumers to borrow and spend more.

For example, following recent cash rate cuts, the RBA has mentioned contributing factors like low wage growth, less than ideal levels of inflation, and ‘spare capacity’ in the Australian economy, a well as global factors like ongoing trade disputes.

Could Australia experience negative interest rates in the future?

There’s increasing speculation that the RBA could lower the cash rate further, potentially to 0.5% or even below that. It’s currently at a historically low level of 0.75%, so it wouldn’t have all that far to go.

After its September board meeting, when the RBA held the cash rate at 1%, it said in a statement that it was “reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target.”

However, Professor O’Neil isn’t convinced that interest rates here will dip below zero.

“The Australian economy, while it’s slowing, is still fairly buoyant so I don’t see a situation in the foreseeable future where Australia is going to move into the negative interest rate territory,” he said.

Instead, he suggested that increased government spending on infrastructure, like rail projects, could be a better way to get the economy going again.


Who are the main winners and losers when interest rates go negative?

Potential winners:

  • Borrowers: Lower interest rates typically mean less interest to pay back on money borrowed from banks. Indeed, negative interest rates could mean a bank ends up effectively paying you to borrow money from it.
  • Visitors to Australia: The RBA explains that generally speaking, when a country lowers interest rates, its currency tends to weaken. If Australia’s interest rates continue to slide, buying Aussie dollars could become cheaper for foreign tourists.
  • Exporters: Australian companies selling goods overseas could also benefit from a weakened Aussie dollar, because it would make Australian goods cheaper to foreign buyers. This could lead to an increase in Australian exports.

Potential losers:

  • Savers: A negative interest rate could mean losing money if you have funds in a savings account or term deposit  with a bank. Even though we haven’t reached that stage yet, Canstar data shows that savers today are generally earning less in interest than in previous years, due to the current low-rate environment.
  • Australian tourists going overseas: If interest rates continue to drop and the Aussie dollar becomes weaker as a result, buying foreign currency for an overseas trip could become more expensive.
  • Pensioners: Particularly those who rely on income from savings accounts or term deposits, and potentially also those whose pension eligibility is assessed using deeming rates (more on that here).
  • Importers: A weak Aussie dollar, a potential side effect of lower interest rates, could make it more expensive for businesses here to buy goods from overseas. However, according to the RBA, it can take a long time for that to have an impact on the prices consumers pay for imported goods at the checkout.

Where in the world are there already negative interest rates?

Negative central bank interest rates are quite rare and, at the time of writing, only four countries – Denmark (-0.75%), Switzerland (-0.75%), Sweden (-0.25%) and Japan (-0.10%) – have them, according to economic analysis website Trading Economics. A further 20 countries, all in Europe, have an official cash rate of zero. 

Danish lender Jyske Bank recently made headlines by offering what’s reported to be the world’s first negative interest rate home loan, with some borrowers able to take out a 10-year mortgage at -0.5%. In Japan, the average deposit account interest rate on offer from commercial banks is -0.20%, according to Trading Economics.

At the other end of the scale, Argentina (85.98%), Zimbabwe (70.00%), Venezuela (27.87%), Haiti (27%) and Yemen (27%) have the highest rates listed at the time of writing.

 

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