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Negative real rate (negative real interest rate) – this is the real rate in a situation where the rate of inflation growth exceeds the level of the nominal rate. The most significant negative effect of a negative real rate is that low-risk assets, such as certificates of deposit (referred to as CDs) and standard bank accounts, do not generate returns for the investor at all.
What does a negative real rate lead to?
A negative real rate is a consequence of the economic downturn. Despite the low level of return on savings, financial institutions are not eager to increase interest rates on loan products, because the additional financial burden on borrowers can lead to an economic crisis, the final elimination of which will take several years in the future.
There are several typical situations that can arise when the real rate is negative. When they begin to earn a minimum income, people tend to save and reduce consumption. On the other hand, they can earn income in the future due to the fact that current loan rates are quite low. Therefore, an experienced person is able to use this circumstance to his advantage.
The impact of a negative real rate on the national currency
A negative real rate negatively affects the national currency, which begins to fall relative to the currencies of other countries. Therefore, the demand for precious metals (primarily gold) and raw materials that can retain their value for a long time is increasing - people use these assets as “ financial haven" Some investors prefer to protect themselves from high inflation by purchasing securities of large foreign companies.
Negative rates became a reality in the modern financial world a few years ago. Dreaming of financial stability, many Russians do not even imagine what amazing (in our opinion today) forms it takes on in prosperous countries. There, in an almost inflation-free economy, depositors sometimes do not receive income from their bank investments, but on the contrary, sometimes they themselves pay the bank for the service of storing money in an account. Will the new reality reach Russia, and under what conditions will this become possible?
Bold experiments
Actually, human history has already known times when, when accepting capital for storage, its “caretaker” took a fee from the owner for his deposit services. This is how banking began many centuries ago, when gold was the only reserve currency. Already in our time, the German economist of the early 20th century Silvio Gesell was the first to theorize the idea of negative deposit interest at the state level. His free money model assumed a small regular payment by citizens to the state for the issue of money (as a fee for a government service). However, the loan interest was completely reset to zero. Money, thus, ceased to serve as a store of value, accelerating its turnover in the economy.
And although a completely successful practical experiment “according to Gesell” took place on the territory of several Austrian cities in the 30-40s of the last century, yet modern economists 10 years ago considered it unthinkable that negative rates would become a reality of the 21st century. The idea of financial demurrage still makes many people twirl their fingers at their temples. In the minds of most of us, at best, the rate is at least zero. However, the national bank of Sweden, the Riksbank, in 2009 became the first modern central bank that began to charge its ward credit institutions a fee for money accepted from them into correspondent accounts, i.e. thus introduced a negative deposit rate of minus 0.25% per annum. Which, however, did not yet mean an unambiguous and immediate extrapolation of negative returns on bank deposits for citizens and corporations.
Countries and rates
Since then, the Swedish model has been gradually adopted by the Central Banks of other economically developed countries, which, after observing a little of the pioneer, in 2012-2016 began to introduce extraordinary methods at home. Negative rates have already been tried (following Sweden) by Switzerland, Japan, and Denmark. However, their key rates do not stand still, they change (in Russian opinion, almost imperceptibly - by hundredths or tenths of a percent), sometimes rising to a positive level just above zero.
If we talk about the experience of the pan-European ECB, then two years ago it lowered its deposit rate for the first time from 0% to minus 0.1%, while simultaneously maintaining the base rate within the range of 0.15-0.25%. Positive bank rates in Canada, the USA, Great Britain, Norway are still hovering around zero... Their regulators are only looking closely at the experience of others. At the same time, there are already American and European government bonds with negative yields (it turns out that investors pay extra to governments for storing their capital). Looking back a little, we will see that the Japanese regulator, long before the Swedish innovations, kept its deposit interest at the lower level of 0.1% for several years in a row in 2001-2006, without even thinking that it would ever enter the negative zone.
Why does the government need negative rates?
What is the reason for such an amazing interest rate policy? Do Western banks really have so much money that they decided to turn depositors against themselves and bribe borrowers with a small commission, instead of earning money on loan interest? After all, the policy of negative interest rates of the Central Bank is not immediately, but gradually transferred to relations between commercial banks and their clients.
To understand, let us remember the conditions under which the Swedish Riksbank began its bold experiment. 2009 is the year of the ongoing global financial crisis, during which investors lost confidence and stopped investing in the real economy, hiding their capital in quiet, safe bank deposits. Almost zero inflation generally developed into deflation, which by that time had reached, in particular, in Sweden a level of minus 0.9%. In response, the economy stopped growing: in addition to GDP, wages, the number of jobs, and demand for goods and services stopped growing. Demand for loans also fell, as potential borrowers were afraid that the crisis would prevent them from paying off their debts in the future. Banks accumulated unclaimed liquidity, which almost stopped working and making a profit.
Measures were required to stimulate economic growth. To restart the economy, theorists have calculated an effective rate of target inflation close to 2% per annum (as strange as this may sound to a Russian who is shocked by the mere fact that inflation in some countries is deliberately raised from negative values). At the same time, the national currency must be protected from sharp exchange rate fluctuations, which is not easy. Economists believe that the introduction of negative interest rates will encourage citizens and corporations to take out loans, forgetting fears of loss of solvency. A negative deposit rate may force people to withdraw capital from risk-free bank deposits in order to invest in real business, for example, in real estate construction. Thus, the long-awaited growth of added value should begin, which will also bring profit to investors.
What is good for the borrower?– then it’s bad for the investor
It is clear that not every Western bank has yet boldly transferred the policy of negative rates to relationships with its ordinary clients, as the state regulator does with supervised credit institutions. Not every private bank is willing to pay borrowers or charge its depositors. But let's see how this happens in life using only a few known examples.
Almost four years ago, the Danish Central Bank introduced a negative base rate (analogous to our key rate), which today has changed to minus 0.65% (with inflation in 2014-2015 plus 0.6%). One ordinary Danish mortgage holder, who took out a home loan more than 10 years ago, was very surprised when at the end of last year the bank paid him a small bonus, instead of once again charging him interest on the loan. At the same time, the floating annual rate of his bank’s mortgage program was approximately +0.56% per annum at that moment. However, according to the mortgage agreement, the client must regularly pay additional commission fees to the bank.
The name of the European bank that was the first to charge its depositors interest for storing money has not been established. Journalists suggest that it was one of the Swiss credit organizations. They say that a negative deposit rate is charged there for amounts over 10 million Swiss francs. According to other sources, the minimum threshold is only 100 thousand CHF, but already in several banks. The introduction of negative interest rates for deposit transactions is currently being discussed in many European countries, incl. in Spain, far from total prosperity.
Side effects
It seems that paid deposits are still a headache for rich VIP clients. It is their large sums that are difficult to completely transfer to cache, hiding everything, for example, in a safe. Cashing out costs may be more expensive than negative interest. The average population may not be affected by this rate. Citizens of economically developed countries have long been accustomed to almost zero rates. Their deposits often increase by only tenths of a percent, approximately equal to our demand deposit rates.
It is also not yet clear how long the era of negative rates will last, how effective it is and whether it is applicable to different economies. After all, along the way, problems have worsened that are not always resolved quickly and successfully. For example, almost zero interest rates could lead to another real estate credit bubble. However, there is reason to believe that Western central banks will find a reasonable solution and will be able to turn monetary policy in the right direction in a timely manner.
Are negative rates possible in Russia?
Russian investors may not be afraid of “paid” deposits for a long time. The high level of inflation, and numerous other risks of the domestic economy, do not yet provide grounds for introducing nominally negative rates. In addition, one of the conditions for the emergence of “good” deflation is a reduction in production costs (for example, due to the introduction of IT technologies), and not a fall in the effective demand of the population.
But de facto, the problems of our investors, although they lie on a slightly different plane, still make us fear the decrease in the value of savings over time. For example, there is a known imbalance between the deposit rate and the price growth index, when inflation eats up the value of invested money, sometimes more than the deposit interest covers this depreciation. And foreign currency deposits (whose low rates are already approaching European ones) do not always save from inflation and devaluation. Especially considering the sharp fluctuations in the ruble exchange rate up and down and the authorities’ intention to prevent the ruble from strengthening so as not to increase the Russian budget deficit, which is heavily dependent on hydrocarbon exports.
Experts suggest that the downward trend in deposit interest rates in Russian banks will continue this year. However, not to negative values, at least nominally. The Chairman of the Bank of Russia fears that inflation in the Russian Federation (calculated by Rosstat) will remain stuck at 6-7% per annum for a long time. The inflation target for the Central Bank is an average figure of 4% by the end of 2017. And some independent economists predict the start of growth in the domestic economy no earlier than 2020, and then only under certain conditions.
Oksana Lukyanets, expert at Vkladvbanke.ru
In some Swiss banks, interest rates on retail deposits have already dropped below zero. Are negative interest rates on deposits possible in Russia?
Of course, negative rates are a nightmare for savers, but they would be very welcome for borrowers. Imagine: you take a ruble and return fifty dollars. Dream!
Of course, savvy investors can combat negative rates by moving into cash. However, for a VIP, going to the cache is not an option. After all, the costs of storing and transporting cash can “eat up” up to 1% per year.
Essentially, negative deposit rates are the equivalent of a tax on money. Previously, negative rates were considered a theoretical delight. Although initially “proto-banks” (for example, goldsmiths) charged a fee for storing money - for placing deposits.
The idea of demurrage, negative interest rates, by German businessman and social reformer Silvio Gesell (1862-1930) was not seriously considered for a long time. It was believed that the natural limit on interest rates was zero.
However, already in April 2009, Gregory Mankiw predicted a negative Fed key rate in the New York Times. If lower interest rates stimulate the economy, and the key rate is already close to zero, why not reduce the rate to negative values? The idea of negative rates seems absurd: lend a dollar, get 99 cents. But the idea of negative numbers, reminds Mankiw, initially seemed absurd.
Mankiw’s prediction quickly came true, although not with regard to the Fed: in July 2009, the Riksbank, Sweden’s central bank, introduced negative rates.
Then negative key rates were established in a number of other countries, including Switzerland, Japan, Denmark, as well as in the eurozone countries (deposit rate - -0.4% per annum). Moreover, negative interest rates have also been established in the interbank lending markets of some countries. Bond yields have also turned negative in some countries.
The Japanese and Germans responded to ultra-low interest rates by increasing demand for safes. Negative rates pose a threat of a run on banks and can lead to a liquidity crisis.
Probably the first bank to upset its customers with negative interest rates on deposits was Alternative Bank Schweiz, which since 2016 introduced a rate of -0.75% on deposits worth more than 100 thousand Swiss francs. Another well-known Swiss bank, Lombard Odier, upsets its wealthy clients in the same way. So the first victims of negative deposit rates are wealthy clients - it is difficult for them to “escape to cash”.
Are negative rates possible in Russia? Not excluded. The condition for their appearance may be deflation. Deflation itself is pleasant and useful for consumers - what's wrong with falling prices? However, it is not deflation that is bad, but its main reason - a reduction in demand - for example, due to a crisis. People don't have money to buy goods, so prices are falling. Of course, if the reason for the decline in prices is a reduction in production costs, for example, as a result of technological progress, then one can only rejoice at such deflation.
For now, the threat of negative interest rates in Russia appears to be low. However, a recession may lead to the realization of this threat. It is possible to soften monetary policy even to negative interest rates.
The head of the world's largest investment firm, BlackRock, called for attention to the dangers of cutting interest rates, which often turn negative, a policy that some central banks have resorted to to support the economic situation. Larry Fink, co-owner and chief executive officer of BlackRock, noted in his annual address to shareholders that low interest rates are also hurting savers, which in turn could mean the policy is having the opposite effect on the economy than expected.
He sees negative interest rates as "particularly worrying" and potentially counterproductive amid social and political risks. This has created the most volatile situation in the global economy in about the last 10 years, MarketWatch reports. “Their [central bankers’] actions are putting severe pressure on global savings and creating incentives for them to seek higher yields, pushing investors toward less liquid assets and higher levels of risk, with potentially dangerous financial and economic consequences,” Fink wrote to shareholders.
Savers are forced to put more money into investments to meet their retirement goals, which means they will spend less on their own consumer spending. These and a number of other factors, including geopolitical instability, are creating “a high degree of uncertainty in the global economy that is not has been observed since pre-crisis times." “Monetary policy is designed to support economic growth, but now, in fact, it causes risks of a reduction in consumer spending,” the German financier concluded.
The IMF is in favor, but...
Meanwhile, the International Monetary Fund also shared its own thoughts on negative interest rates. Its experts said that "overall, they help provide additional monetary stimulus and financial conditions that support demand and price stability." The IMF believes these rates could encourage the private sector to spend more, although it acknowledges that savers could be hit.
The IMF does acknowledge that there is a "limit to how far and how long" negative interest rates can go. Such a policy could cause “unpredictable consequences”: for example, banks will begin to lend to risky borrowers in an attempt to compensate for the decline in the number of depositors. Negative interest rates can also trigger boom-bust cycles in asset prices, the IMF notes.
Extraordinary measure
The logic behind introducing negative rates is very simple, says Robert Novak, senior analyst at MFX Broker. In conditions where the rates at which commercial banks can place money on deposit with the Central Bank are positive, and the economic prospects are uncertain, banks often prefer not to lend to households and businesses, but to earn money without risk by simply placing money with the Central Bank.
When rates become negative, it becomes unprofitable to keep money in the Central Bank: in order to earn money, banks are forced to engage in active lending - it is better to lend money even at a minimal interest rate and receive at least some income than to obviously lose when placing it on a deposit with a negative rate. Thus, by introducing negative rates, regulators are trying to force banks to lend more actively, and to issue loans at a minimum interest rate. In the future, this policy of “cheap loans” should have a stimulating effect on the economy.
Yes, says Robert Novak, Lawrence Fink's comments about the possible negative consequences of negative interest rates are correct. But these negative consequences are unlikely to materialize if the period of negative rates is short-lived. Still, the world's central banks consider this measure as extraordinary and do not intend to delay its application. So this policy is unlikely to lead to any serious problems.
The new chapter of the world economy
Zero or negative rates are the same as the new head of the world economy, says Alor Broker analyst Alexey Antonov. After the 2008 crisis, the United States and the eurozone did this in order to stimulate economic recovery, but they did not think about the consequences and the proper effectiveness. And, as we have seen from history, it was in vain - because the expected result did not happen. While the US is gradually recovering, growth in the eurozone is almost zero.
Over long periods, the model is disastrous for developed economies, and it seems, the expert says, that the American regulator understands this after all, since it is already thinking about raising the rate. Now they are faced with a serious question - to raise the rate, despite the global risks from China and cheap oil, or to balance at the current zero rates and wait for economic growth, and only then raise it.
Objectively, Antonov believes, now the Fed has no effective measures left to maintain the economic balance, and, perhaps, in the event of a crisis, the story of launching the printing press may repeat itself. That is, in other words, it is less stressful for the economy not to raise the rate, but this will only have an effect for some time, until the next time the machine is connected to the business - this will not solve the global problem. An increase in it, which after a while would somewhat sober up the economy, would solve the problem. But here again the question, says the expert, is whose interests does the government adhere to? Objectively, he now needs public peace and business support, so, probably, the saga with retention will continue.
We're not going there
As for the Russian Federation, then, of course, the introduction of negative rates by the Bank of Russia is out of the question, Robert Novak is sure. This measure is introduced by central banks only when there is a real threat of deflation that cannot be prevented by any other measures. In Russia, on the contrary, there is inflation that is almost twice the target level of 4%. In such cases, in world practice, not negative, but, on the contrary, increased rates are used. Which, in fact, is what the Bank of Russia did.
Nevertheless, according to Robert Novak, Russia can derive some benefit from the negative interest rates involved in Europe and Japan. Rates on Russian bonds (both government and corporate) look very attractive, and, as Bloomberg reported yesterday, Western hedge funds are showing increasing interest in ruble assets. So, all other things being equal, the regime of negative rates in the leading economies of the world will contribute to the influx of capital into the Russian Federation.
With regard to Russian realities, Alexey Antonov agrees, everything is somewhat different here. Our economy is heavily dependent on the raw materials sector, so any fluctuations in the oil market seriously affect the internal policy of the Central Bank. In a situation where oil sank significantly and the currency soared to unprecedented heights, the Central Bank was forced to sharply increase the rate, otherwise the economy would have collapsed. Currently, the Central Bank adheres to the policy of fighting inflation, which is why the rate has remained at the same level.
However, how long will he stick to it, the expert asks, is also a difficult question, because a high rate one way or another affects the development of such an important sector of the economy as small and medium-sized businesses. A slight reduction in it at the next meeting of the Central Bank would have a positive effect on improving the economy, but, believes Alexey Antonov, it could hit the pockets of Russians.
It should be noted, however, that maintaining the rate of the Central Bank of the Russian Federation at the current level, despite the fact that economies everywhere are stimulated to grow by low rates, even minus, is also a dangerous practice. It is obvious that there is no other recipe for growth other than cheap money in the world economy today, and neither does our Central Bank. That’s why they hardly talk about growth there, preferring other goals and terms. However, despite the interest in Russia on the part of Western speculators, which does not bring us much benefit, although it feeds the money market (which then turns into a withdrawal of capital), these goals are hardly the optimal strategy. We have been told for many years that low inflation will lead to economic growth and real investment, but it is obvious that its decline does not correlate with economic growth in any way, rather the opposite.
Maybe we should stop being afraid of taking money out of citizens’ pockets - which is how high inflation is usually reproached - and just put it there, making it more accessible? But this is a completely different logic. As for the phenomenon of negative interest rates, of course, it requires observation and study; there is not much material on this new practice yet.
Russians who complain about high mortgage rates can only envy Europeans, some of whom banks pay extra “in gratitude” for the loan they took out. The first bank to switch to negative lending rates was Nordea Bank. This happened in Denmark at the beginning of last year. Since then, at least two other banks in Belgium - BNP Paribas and ING - have paid extra to their clients. In particular, this was recently reported by Het Neuwsblad. The banks in question argued that the negative rates only affected a “limited number of contracts.”
These situations arise for loans with a floating interest rate (these are mainly mortgage loans), depending on key and interbank rates, explains Natalya Pavlunina, head of the retail products department of the retail business department of Loko-Bank.
When, for example, the key rate reaches negative values, the interest rate on the loan also becomes negative. The current values of the European interbank offered rate Euribor and a number of others have become negative and, depending on the period, range from -0.348% per month to -0.012% per year, notes the CEO. Accordingly, if a number of banks in their loan agreements have tied client rates to Euribor, then it turns out that it is no longer the client to the bank, but the bank that must pay the client for giving him a loan.
Negative rates on the interbank market and the entire phenomenon of negative rates in general are a consequence of the ultra-soft monetary policy pursued (as well as by central banks of other developed countries). “The central banks of most developed countries have been pursuing expansionary monetary policies over the past five years, reducing lending rates to a minimum and introducing negative rates. The European Central Bank and the Bank of Japan are trying to stimulate the economy with negative rates. Central banks of European countries (Switzerland, Sweden, Denmark) use negative deposit rates to reduce capital inflows and adjust course national currencies against the euro,” notes the chief analyst of the analytical department.
The European Central Bank took a new round of easing its policy at its meeting on March 10 this year. He lowered the key rate from 0.05% to zero, and the deposit rate was lowered from -0.3 to -0.4%. In addition, the volume of asset repurchases from the market was expanded from €60 billion to €80 billion per month. The de facto head did not rule out introducing a negative key rate. "Looking ahead, taking into account the current outlook for price stability, the Governing Council expects the ECB's key interest rates to remain at current or lower levels for an extended period of time," he said.
A negative rate (on deposits) should ideally encourage commercial banks to lend more, rather than hoard money in accounts with the Central Bank. The population, for whom the return on deposits is decreasing, must spend more, which, coupled with the emission pumping, should accelerate inflation to the target 2% and increase the income of the corporate sector.
In practice, things don't work out so smoothly. The population does not spend, but saves, but increasingly prefers to keep money in demand accounts (this requires banks to have a large amount of liquidity, which is unprofitable) or even keeps it at home in the form of cash. Inflation is not growing (deflation has already been recorded several times in the eurozone this year), as cheap energy resources are pulling consumer prices down.
Analysts believe that "so far, negative interest rates have failed to raise inflation expectations in the eurozone, Switzerland and Japan, and have shown only marginal effectiveness in this regard in Sweden."
The former head of the company, in one of his interviews, noted that negative rates lead to a reduction in capital expenditures, and low investments do not allow increasing labor productivity. The result is low economic growth rates. Banks are forced to invest money in highly liquid government bonds, but their yield is often also negative. provides such data. There are currently €2.6 trillion worth of negative-yielding bonds traded in the eurozone. When purchasing seven-year German government bonds, an investor will lose €2 per thousand every year. It turns out to be a vicious circle that only leads to a drop in income in the banking system.
Dangerous experiment
American analysts called the ECB’s negative rates a “dangerous experiment.” “We believe that the potential decline in banking profitability due to low benchmark and negative deposit rates will be a major risk factor for European banks in 2016,” Morgan Stanley said. Russian analysts also do not see anything good in negative rates. Konstantin Petrov believes that the current financial policy of artificial economic stimulation through ultra-low rates and increasing the money supply in the context of a decrease in real production does not lead to inflation, but to deflation and the continuation of speculative growth in stock markets, where excess liquidity is concentrated. This may negatively affect the stability of banks and, instead of stimulating economic growth, lead only to prolonged stagnation. “As a result, this could lead to big problems in the financial infrastructure and another round of the financial crisis,” he believes.
, an analyst at Alfa Capital Management Company, believes that stories with negative client rates are one-time anomalies and such loans will not be carried out on a mass scale, therefore these particular cases do not pose a threat to the banking system. But globally negative rates create certain risks, including forcing banks to adjust their approach to risk management, increasing risk exposure in order to compensate for the decrease in income from falling rates and to place excess liquidity, he notes.
“As a result of this, bubbles may inflate in the markets, which will ultimately at least complicate the process of normalizing monetary policy, and in a bad scenario may provoke new waves of crisis,” Andrei Shenk fears.
At the same time, analysts believe that banks will not put up with negative rates. “It is unlikely that banks will allow this phenomenon to become widespread,” believes Konstantin Petrov. Dmitry Monastyrshin draws attention to the fact that since banks in developed countries have the opportunity to attract funds from clients and regulators at negative rates, banks manage to maintain margins on client contracts, even if the rate on them goes negative. It is worth noting that even with negative loan rates, the client will most likely have to pay the bank a small amount in addition to the principal debt due to the presence of service fees. “However, the situation when the lender pays the borrowers is inherently absurd and bankers in the relevant countries are already taking measures to protect their capital,” notes Natalya Pavlunina. According to her, a number of European banks have already supplemented their mortgage lending conditions, fixing the minimum possible value of the loan rate, and also turned to regulators for clarification and the possibility of changing legislation. The only question that remains unanswered is how the financial system will fare if the ECB and other regulators continue to ease their monetary policy and inflation and the economy do not recover.
