Are negative deposit rates possible in Russia? The largest bank in Switzerland has introduced negative rates on deposits. Loan with a negative interest rate.
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 United States 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.
Why do ordinary people like scary movies so much? It turns out that this is an opportunity to pretend to relive your fears, become more confident and even let off steam. And this is true - you just need to choose an exciting horror film that will make you really care about the heroes.
Silent Hill
The story takes place in the city of Silent Hill. Ordinary people wouldn't even want to drive past it. But Rose Dasilva, little Sharon's mother, is simply forced to go there. There is no other choice. She believes that this is the only way to help her daughter and keep her out of the psychiatric hospital. The name of the town did not come out of nowhere - Sharon constantly repeated it in her sleep. And it seems like a cure is very close, but on the way to Silent Hill, mother and daughter get into a strange accident. Rose wakes up to find that Sharon is missing. Now the woman needs to find her daughter in a cursed city full of fears and horrors. The trailer for the film is available for viewing.
Mirrors
Former detective Ben Carson is going through hard times. After accidentally killing a colleague, he is suspended from the New York Police Department. Then the departure of his wife and children, an addiction to alcohol, and now Ben is the night watchman of the burnt out department store, left alone with his problems. Over time, occupational therapy pays off, but one nightly round changes everything. The mirrors begin to threaten Ben and his family. Strange and frightening images appear in their reflection. To save the lives of his loved ones, the detective needs to understand what the mirrors want, but the problem is that Ben has never encountered mysticism.
Asylum
Kara Harding is raising her daughter alone after the death of her husband. The woman followed in her father’s footsteps and became a famous psychiatrist. She studies people with multiple personality disorder. Among them there are those who claim that there are many more of these individuals. According to Kara, this is just a cover for serial killers, which is why all her patients are sent to death. But one day the father shows his daughter the case of the tramp patient Adam, who defies any rational explanation. Kara continues to insist on her theory and even tries to cure Adam, but over time, completely unexpected facts are revealed to her...
Mike Enslin doesn't believe in an afterlife. As a horror writer, he is writing another book about the supernatural. It is dedicated to poltergeists living in hotels. Mike decides to settle in one of them. The choice falls on the infamous room 1408 of the Dolphin Hotel. According to the hotel owners and city residents, evil lives in the room and kills guests. But neither this fact nor the senior manager's warning frightens Mike. But in vain... In the issue the writer will have to go through a real nightmare, from which there is only one way to get out...
The material was prepared using the ivi online cinema.
There is increasing talk in the media about negative interest rates. How effective this approach can be, since there is great uncertainty about the consequences for commercial banks, organizations and other economic entities and their behavior.
Many developed countries around the world are entering the realm of negative interest rates. Five central banks - the European Central Bank (ECB), the Danish National Bank, the Swiss National Bank, the Bank of Sweden and the Bank of Japan - have already introduced negative rates on commercial bank funds held in deposit accounts at the central bank. In fact, commercial banks must pay to store their funds with central banks. The main goal of these decisions is to stimulate economic growth and combat low inflation and the growing threat of deflation.
Why use negative interest rates?
In simple terms, with negative rates, a depositor, such as a commercial bank, must pay the central bank to store funds at the government-owned central bank. What is the purpose of such a policy? Once banks had to pay to hold their cash, they would be incentivized to lend any additional cash to businesses and individuals, fueling the economy. Another example would be a depositor (such as a large company) who must pay to hold funds with a commercial bank if the latter uses negative rates. In this case, one goal would be to encourage companies to use the money to invest in businesses, again to increase economic growth. That is, negative rates imply that lenders pay borrowers for the privilege of making loans. However, this would be an extreme case at the commercial bank level, since the economic logic of lending is to earn interest in exchange for taking on the borrowers' credit risks. However, borrowing is limited by the use of negative interest rates, and the goal is to promote consumption, one of the main engines of economic growth. So far, the listed goals and intentions for negative interest rates are very theoretical, and there is uncertainty about their implementation in practice.
Eurozone example
In the eurozone, the central bank's goal is to stimulate economic growth and increase inflation. The ECB must ensure price stability by keeping inflation below 2%, and at the same time as close to this figure as possible, over the medium term (currently inflation in the eurozone is slightly below zero). Like most central banks, the ECB influences inflation by setting interest rates. If a central bank wants to take action against too high a rate of inflation, it basically raises interest rates, which makes borrowing more expensive and makes saving more attractive. Conversely, if he wants to increase inflation that is too low, he lowers interest rates.
The ECB has three main interest rates at which it can operate: margin lending for providing overnight loans to banks, main refinancing operations And deposits. The prime refinancing rate or base interest rate is the rate at which banks can borrow regularly from the ECB, while the deposit interest rate is the rate that banks receive on funds deposited with the central bank.
With the eurozone economy recovering very slowly and inflation close to zero and expected to remain well below 2% for a long time, the ECB decided it needed to cut interest rates. All three rates have been falling since 2008, with the most recent cut being made in March 2016. The prime rate was cut from 0.05% to 0%, and the deposit rate went further into the negative from -0.3% to - 0.4%. The ECB confirms that this is part of a set of measures aimed at ensuring price stability over the medium term, which is a necessary condition for sustainable economic growth in the euro area.
The deposit rate, which has become even more negative, means that eurozone commercial banks that deposit money with the ECB must pay more. The question may arise – is it impossible for banks to avoid negative interest rates? For example, couldn't they just decide to hold more cash? If a bank holds more money than required for minimum reserve purposes, and if it is unwilling to lend to other commercial banks, then it has only two options: keep the money in an account with the central bank or keep it in cash (of course the most expected option by central banks is that banks will increase lending to businesses and individuals). But storing cash is also not free - in particular, the bank needs a very secure storage facility. Thus, it is unlikely that any bank would choose such an option. The most likely outcome is that banks will either lend to other banks or pay a negative deposit rate. Between these two options, the second one seems more realistic, since at the moment most banks hold more money than they can lend, and it is not necessary to borrow from other banks.
The opposite effects of negative rates
As central banks aim to boost economic growth and inflation through negative interest rates, such policies are becoming increasingly unusual and raise questions worth considering. Below are some of the main pros and cons.
Firstly Given that central banks' intentions are being met and negative interest rates are stimulating the economy, this would be a positive sign for the banking sector. If markets believed that negative interest rates improved long-term growth prospects, this would increase expectations of higher inflation and interest rates in the future, which is beneficial for banks' net interest margins (commercial banks make money by taking on credit risks and charging higher interest on loans than they pay on deposits - in this case they have a positive net interest margin). Moreover, in a stronger economy, banks would be able to find more profitable lending opportunities, and borrowers would be more likely to be able to repay those loans. On the other hand, negative interest rates could harm the banking sector. If the lending rate is constantly kept lower due to falling interest rates, and commercial banks are unwilling or unable to set the deposit rate below zero, then the net interest margin becomes smaller and smaller.
Secondly, a negative interest rate policy should encourage commercial banks to lend more to avoid central bank charges on funds that exceed reserve requirements. However, for negative rates to encourage more lending, commercial banks would have to be willing to make more loans at lower potential earnings. Since negative interest rates are introduced as a counterbalance to slow economic growth and the risks of deflation, this means that businesses need to solve problems arising in this area and, as a result, banks face increased credit risks and reduced profits at the same time when lending. If profit levels suffer too much, banks may even reduce lending. Moreover, the difficulty of setting negative rates for savers could mean higher debt costs for consumers.
Third, negative interest rates also have the potential to weaken a nation's currency, making exports more competitive and increasing inflation as imports become more expensive. However, negative interest rates can trigger a so-called currency war - a situation in which many countries seek to deliberately reduce the value of their local currency in order to stimulate the economy. A lower exchange rate is clearly a key channel through which monetary easing operates. But widespread currency devaluation is a zero-sum game: the global economy cannot devalue money itself. In a worst-case scenario, competitive currency devaluation could open the door to protectionist policies that would negatively impact global economic growth.
Fourth From an investor's perspective, negative interest rates could, in theory, serve the same function as cutting rates to zero - this could be beneficial for exchanges since the relationship of interest rates to the stock market is quite indirect. Lower interest rates imply that people looking to borrow money can enjoy lower interest rates. But it also means that those who lend money or buy securities such as bonds will have less opportunity to earn interest income. If we assume that investors are thinking rationally, then falling interest rates will encourage them to take money out of the bond market and put it into the stock market.
But in practice, this particular policy of negative interest rates may not be so useful. Investors may view negative interest rate policies as a sign of attempts to sort out serious problems in the economy and remain risk averse. Also, the use of negative interest rates will not necessarily encourage commercial banks to increase lending, which will make it more difficult for financial companies to make profits in the future and harm the performance of the global financial sector. Problems in the financial sector are very sensitive for the entire stock market, and they can weaken it. And even if commercial banks wanted to increase lending, success in encouraging businesses and individuals to borrow more money and spend more is questionable.
Fifthly, negative rates could complement other easing measures (such as quantitative easing) and signal to the central bank the need to address the economic slowdown and missed inflation target. On the other hand, negative interest rates could be an indicator that central banks are reaching the limits of monetary policy.
Main conclusion
Central banks are determined to do everything possible to increase economic growth and inflation. With interest rates already at zero, an increasing number of central banks are resorting to negative interest rates to achieve their goals. However, this is a relatively new tool for them, and the main opportunities and risks of such a policy have not yet been realized. Therefore, it is worth taking a closer look at and monitoring the unintended consequences of these increasingly popular policies. Currently, the eurozone economy is gaining momentum slowly, inflation is low, commercial banks are in no hurry to increase lending volumes, but instead are looking for other ways to reduce the potential damage to profits, the desire of businesses and individuals to take out more loans at a lower interest rate is growing quite slowly, investors are not rush to take on more investment risks, bond yields remain at record lows. Negative interest rates will take longer to realize the full impact.
Gunta Simenovska,
Head of Sales Support Department, Business Development Department, SEB Bank
Sources: European Central Bank, World Bank, Bank for International Settlements, Nasdaq, Investopedia, Bloomberg, BBC, CNBC
Today I bring to your attention a small educational program about what it is negative discount rate. I already discussed the concept itself once (via the link), talking about what its increase and decrease leads to. Let me briefly remind you that this is one of the key financial levers at the disposal of the Central Bank of the state, with the help of which it regulates the level of inflation in the country, the exchange rate of the national currency and, globally, the pace of economic development.
The discount rate largely determines the cost of attracting and selling resources on the interbank market, as well as rates on loans and deposits for enterprises and households. The higher the discount rate, the more expensive the resources, which slows down economic growth, but also curbs inflation and devaluation. And, conversely, the lower it is, the stronger the economic growth, but at the same time the stronger the inflation and devaluation.
The size of the discount rate can serve as one of the indicators of the state’s economy: the lower it is, the higher the level of economic development of the country. For example, in the most developed countries the current discount rate ranges from 0 to 1%.
However, there is another side to the coin. Practice shows that even with excessively low interest rates, economic growth rates can slow down under the influence of other factors, which is what we are now seeing around the world. Likewise, inflation is falling, in many countries with a high level of development it is close to zero or even often negative (deflation). And this is by no means a good indicator, as many may think.
In such a situation, it is very difficult to stimulate the economic development of the country. Judge for yourself: loan rates are already minimal, loans are available to everyone, but this is not enough for the desired economic growth. And in such a situation, the country’s Central Bank may resort to such an extreme measure as establishing a negative discount rate. What does this mean?
A negative discount rate, influencing pricing on the state capital market, leads to the formation of, if not negative, then at least zero rates in the country's banking institutions. This suggests that when receiving a loan, the borrower not only does not pay interest, but can also receive a bonus from the bank for lending, and the depositor, on the contrary, pays extra to the bank for keeping his money on deposit there.
For us this still seems like a fantasy, but for some countries it has already become a reality. Negative discount rates were introduced by banks in several European countries, and most recently by the Bank of Japan.
Negative interest rates currently have the highest values in Switzerland and Denmark – there they amount to -0.75%. In Sweden the discount rate is -0.5%, and in Japan - -0.1%. So far there are only 4 countries with negative interest rates, but it is possible that other states may be included in their number. There has already been a lot of talk about establishing a negative discount rate, for example, in Israel; the Czech discount rate (0.05%) is closest to zero on the positive side.
Why do central banks introduce negative interest rates? To stimulate business development and economic growth. If, in the opinion of the central bank, there is not enough business lending in the country even at positive rates close to zero, then at zero and, especially, negative rates, more loans will be taken. On the other hand, people who keep savings on deposits, when they have to pay extra to the bank for this, will think about withdrawing them and investing them in other instruments that contribute to economic development, for example, in the same securities of enterprises.
The introduction of a negative discount rate can lead to both the strengthening and weakening of the country’s national currency. For example, when the Bank of Japan recently resorted to such a measure, the Japanese yen strengthened against all world currencies by about 10% in a couple of weeks, and this was even before the new conditions came into effect. In Switzerland, on the contrary, the establishment of a negative discount rate helped to slightly and briefly reduce the exchange rate of the Swiss franc, for which the country often spent enormous financial resources (to maintain and maintain the exchange rate below the administratively established value, as a result, this measure was abandoned).
What negative consequences could the introduction of a negative discount rate lead to? Well, for example, to failures of banking computer systems, which calculate many indicators based on its value - a similar problem immediately arose in Denmark.
In many countries, the yield on government bonds held by both domestic and foreign investors is tied to the discount rate. If the discount rate becomes negative, it turns out that now they will not only not receive income on the purchased securities, but will also have to pay extra for owning them.
Owners of savings in various pension, insurance, and investment funds, the profitability of which is also calculated based on the level of the discount rate, may also experience losses.
As a rule, when introducing a negative discount rate, the Central Bank believes that this is a temporary last resort: when the planned inflation and economic growth indicators are achieved, it can be raised back and made positive. However, it is difficult to plan how things will actually turn out; it is likely that negative interest rates will be in effect in a number of countries for at least several years.
That's all. Now you know what a negative discount rate is and what it is used for. Increase your level of financial literacy on the website. See you again!
