Negative interest – are there any positives to rates going sub zero?

In late 2020, the Australian Government issued bonds (a bit like an IOU where an investor pays money to the government and the government promises to pay it back after a set period of time), something it does on a regular basis. So far, so normal. But on that occasion, instead of earning interest, some of the bonds were issued at a negative rate of -0.01%, essentially meaning the government would be paid to borrow money.

While rare in Australia, some countries have been experiencing negative interest rates for some time now. The good or bad news, depending on whether you’re a borrower or saver, is that for now it doesn’t appear that negative interest rates will be filtering through to Australia’s commercial banks who offer saving accounts and loans to consumers.

This article covers:

• What are negative interest rates?
• What causes negative interest rates?
• Could Australia experience negative interest rates in the future?
• Who are the main winners and losers when interest rates head towards negative?
• Where in the world are there already negative interest rates?

What are negative interest rates?

Negative interest rates happen when the rates that financial institutions apply to consumers or investors borrowing money or putting into 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 governments to borrow and lend at negative rates or for national central banks, like the Reserve Bank of Australia (RBA), to set a negative cash rate. This would mean 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 lower rates is to encourage retail banks to lend money to consumers and businesses, instead of leaving that money on deposit and being charged interest.

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

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

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 a recent cash rate cut in November 2020 when the cash rate was lowered to 0.10%, the RBA’s board mentioned contributing factors such as the high level of unemployment and the fact that it expects it to be some time before Australia’s economy reaches pre-pandemic levels of output.

Could Australia experience negative interest rates in the future?

Despite lowering the cash rate on three separate occasions in 2020, the RBA says it’s “extremely unlikely” that it will employ a policy of negative interest rates, because it believes that any benefits would be “outweighed by the costs”.

And because the RBA’s cash rate policy is one of the main factors that determines how commercial banks set their interest rates for customers, it seems unlikely that Aussie consumers will see negative interest rates advertised at their local bank any time soon.

We have released a snapshot of Key Economic Indicators – https://t.co/rn3pVavN3m pic.twitter.com/SiHBVbQ3s8

— RBA (@RBAInfo) December 4, 2020

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

Potential winners:

• Borrowers: Lower interest rates typically mean less interest to pay back on money borrowed from banks. Indeed, negative interest rates would 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 and using Aussie dollars could, in theory, become cheaper for foreign tourists, as soon as they are allowed to travel here again. That said, despite Australia’s currently low interest rates, as of early January 2021, the Aussie dollar is at the highest level it’s been relative to the US dollar since mid 2018.

• 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.

• Australians spending money overseas: If interest rates continue to drop and the Aussie dollar becomes weaker as a result, buying a foreign currency or transferring cash to another country could become more expensive based on exchange rates.

• Pensioners: 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, may be potentially worse off.

• 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.

Countries with negative interest rates

Even though many countries are still feeling the economic impacts of the pandemic, negative central bank interest rates are still quite rare. At the time of writing, only three countries – Switzerland (-0.75%), Denmark (-0.60%), and Japan (-0.10%) – have them, according to economic analysis website Trading Economics. A further 22 countries, all in Europe, have an official cash rate of zero.

In 2019, Danish lender Jyske Bank made headlines by offering what was 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%. This year, another lender, Nordea Bank Abp, began offering Danes 20-year mortgages at a fixed rate of 0%.

Meanwhile, in Japan, the average deposit account interest rate on offer from commercial banks is -0.2%, while in Switzerland it’s -0.39%, according to Trading Economics.

At the other end of the scale, Venezuela (38.15%), Argentina (38%) and Zimbabwe (35%) have the highest central bank interest rates listed at the time of writing.

Compare Home Loans

This article was reviewed by our Sub Editor Jacqueline Belesky before it was published as part of our fact-checking process.