What are negative interest rates?
Negative interest rates theoretically make taking out credit cheaper than using or keeping cash. Although it sounds counterintuitive, it would effectively mean that, for borrowers, the bank would effectively pay you to take out a loan with them, and for savers, that you would be paying the bank to hold onto your savings.
So, are negative interest rates a good or bad thing?
Although an unconventional tool for monetary policy, negative interest rates are, in theory, a way for central banks to stimulate the economy when they are left without other policy options. From a home owners perspective, this could create heightened competition amongst lenders on top of already record low rates. It could also mean, however, that ever decreasing interest rates could put pressure on bank profit margins, especially if savers begin to withdraw their cash as banks begin to charge customers to hold onto their money.
Are we already seeing negative interest rates?
Internationally, negative interest rates are making headlines with a number of countries hovering ever closer to the 0% mark, meaning many of the major world markets are at least discussing the possibility and effects of negative interest rates in the future. In August we saw Denmark’s third largest lender, Jyske Bank A/S, begin offering a -0.5% interest rate before fees. Although the negative rate offering has garnered a large amount of commentary, it is not surprising as the composite home loan rate across the euro area fell to 1.65% in June – the lowest since records began in 2000.
How likely are we to see negative interest rates here in Australia?
The latest RBA forecasts have downgraded their predictions for future growth in Australia, admitting ‘it is likely to take longer than earlier expected for inflation to return to 2%’ with inflation not expected to exceed 2% until 2021. With this in mind, RBA governor Rob Lowe admits they may need to resort to unconventional methods should further economic stimulus be required, ‘When we look overseas, we see some central banks have very low-interest rates and some countries have negative interest rates. In Switzerland right now the interest rate is -0.75%, in the euro area it’s -0.40% and in Japan it’s -0.10%. So some central banks have gone negative. That’s one possibility’.
Another interest rate cut looks likely for Australia in the first quarter of 2020, with record low interest rates looking to be sustained for a period of time, the RBA stating ‘It is 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.’