Negative interest rates are pretty hard to imagine because we’ve never had them in Australia, but as we inch ever closer to an official cash rate of 0 per cent, speculation is mounting that the official cash rate could soon enter the negatives.
The Reserve Bank of New Zealand (RBNZ) recently advised trading banks that the cash rate might move from the barely positive into the negative.
Right now the RBNZ is holding off such a move in favour of other monetary stimulus measures. But the big banks strongly oppose negative rates, arguing they’ve had limited success overseas and that the country’s banking technology isn’t up to it.
For the central bank, however, it remains an option to stimulate spending, investment and employment as part of the COVID-19 recovery. By reducing the cost of borrowing, economic activity picks up – or so the theory goes.
Those turning to unconventional monetary policy include Japan, Switzerland and the European Union. Negative interest rates range from -0.1 per cent to -0.8 per cent for selected tiers of central bank deposits.
In theory, negative interest rates would mean that savers would effectively be paying to store their money in the bank while borrowers would be earning interest on their home loan.
A real-life example of this is Jyske Bank in Denmark, who recently made history for launching the world’s first negative home loan interest rate. Under the 10-year fixed-rate mortgage at -0.5 per cent borrowers make their usual monthly repayments but the outstanding amount reduces every month by more than your repayment.
“We don’t give you money directly in your hand, but every month your debt is reduced by more than the amount you pay,” said Jyske’s housing economist, Mikkel Høegh.
But this is the issue: why would savers pay banks to accept deposits? First, they can hold their investments in cash at a zero-interest rate rather than pay a bank. Second, they can choose to invest in riskier assets with positive interest rates.
Because of this, only very large depositors (with limited ability to store cash) tend to leave their money in banks offering negative rates, while ordinary depositors receive a rate of zero or more.