Tackling negative interest rates

  • By Divij Gaur

While Australia is yet to confront negative interest rates, RFi Group research senior research analyst Divij Gaur assesses how the framework is impacting global banks

As the Reserve Bank of Australia (RBA) slashes down the interest rate to a record low of 0.25 per cent, the idea of entering a negative interest rate territory does not seem so farfetched when compared to a few years ago.

In fact, in a speech dated only back in November last year, RBA governor Philip Lowe quashed the idea of Australia moving into negative interest territory, adding that at this stage there was no need for the central bank to use unconventional monetary policy.

Fast forward to March 2020 and the Reserve Bank recently announced a rescue package in light of current economic conditions.

So what are the implications of negative interest rates for consumers and banks?

Current economic conditions are no stranger to unconventional monetary policy tools, and quantitative easing has found its way in economic planning and might soon become a useful feature within the RBA’s monetary policy toolbox.

The current interest rate system rewards the consumer with a fixed percentage to hold money within a bank and charges the same fixed percentage when a consumer borrows from a bank.

However, for negative interest rates, this is the exact opposite, where a consumer has to pay the bank a fixed percentage to hold any of its money, and the bank pays the consumer the same fixed percentage when borrowing from the bank.

Negative interest rate policy (NIRP) is designed to stimulate a slowing economy through consumption and investment, as depositors are encouraged to spend their money rather than save it in a bank that would incur a charge, inevitably leading to a financial loss.

The precedence that banks will have to undergo is the provision of financial education to its existing customer base on negative interest rates and how it affects them.

Due to the complexity of its nature, NIRP poses a concern on banking institutions and the existing financial infrastructure, the latter being something society is familiar and comfortable with.

The precedence that banks will have to undergo is the provision of financial education to its existing customer base on negative interest rates and how it affects them.

A key example would be how Jyske Bank, Denmark’s third largest bank, has started to offer the world’s first negative interest rate mortgage -- a 10-year mortgage at -0.5 per cent.

The bank has implemented proactive measures to tackle confusion by directing customers to an extensive FAQ page on their website, and this addresses key questions and queries customers might have from the onset of this shift.

However, entering a negative interest rate territory does not necessarily mean the economy is in safe hands.

Examples from other negative interest rate bearing economies, such as Switzerland and Japan, showcase a different side to the story.

Swiss Banks like Credit Suisse and UBS have experienced significant deficit and blame negative interest rates as the reason for their underperformance.

While in Japan, an early assessment of negative interest rate show contradiction; NIRP is viewed as an effective economic policy, while also slowing the economy down due to an ageing population, shrinking labour force and the high usage of cash.

With this being said, the outcome for Australia can be anything – it may spur the economy or follow the same footsteps as its European and Japanese allies.

With no counterfactual in place for this economic theory, one can just be hopeful for a positive – negative interest rate policy.


Sources used:
•    https://www.theguardian.com/money/2019/aug/13/danish-bank-launches-worlds-first-negative-interest-rate-mortgage
•    https://www.ft.com/content/67f75b4c-fbe9-11e9-a354-36acbbb0d9b6
•    https://www.japantimes.co.jp/news/2019/08/14/business/negative-rate-policy-work/#.XnqMeNMzbjA