Negative rates have stunned the financial world. Below zero
Let us recall that since October 27, 2014, this interest rate has been at a historically low level in Sweden: 0%. Now she is in the red.
At the same time, Riksbanken is buying government bonds worth 10 billion crowns, and is ready to buy more, the central bank said in a press release.
Riksbank analysts suggest that low inflation, which was at minus 0.3% in December at the rate of development for the year, may have already reached the “bottom”, so to speak, and will now begin to rise. In any case, the goal of 2% inflation per year is still far away.
Analyzing the situation in the surrounding world, the Riksbank concludes that the world economy is “bouncing back” after the financial crisis, but slowly. Since December last year, however, the risk of deterioration in economic development has increased. In particular, the fall in oil prices, which can have a positive impact on production growth, on the other hand, leads to low inflation on a global scale. The situation in Greece also does not add confidence in the development trends of the global economy.
As for Sweden specifically, the Riksbank believes that production growth is supported by both low oil prices, a weak Swedish krona exchange rate, and a low bank interest rate. According to the bank, Sweden's GNP will grow faster and the labor market will strengthen.
What will this “minus rent” entail for Swedish residents: What will happen to bank loans? What will happen to the money that people put aside “in reserve” in their bank deposit accounts? What will happen to our mortgage loans?
A negative refinancing rate means that banks have to pay to deposit money into their Riksbank accounts. And they are obliged to do this if, as a result of all banking transactions of the current day, they have money left in their cash desk (overnight/overnight deposits).
But will this mean that banks will want to cover these costs at the expense of their clients? And they will start charging us for the fact that we want to put our saved money into a savings bank account?
In principle, interest rates on our accounts or mortgages should not be affected by these negative rents. Because the level of interest on deposit accounts and on loans is determined by each bank individually, and not by the Riksbank.
But for the banking system as a whole, the level of this short-term refinancing rate is of great importance.
This rate determines the interest that banks pay when they borrow money from each other. It could also lead to businesses being able to take out loans at lower interest rates. And this, in turn, can lead to an increase in investment, that is, precisely the stimulation of the Swedish economy that the Riksbank is striving for by lowering the interest rate. And an increase in production usually “triggers” the mechanism of inflation growth. This is what the Riksbank is trying to achieve.
Experience of other countries with negative interest rates shows that if this minus is small, then this does not affect small clients who habitually save money in bank accounts. In Denmark, FIH announced in March last year (following the central bank's rate cut) that for every 1,000 kroner a customer holds in the bank, he will have to pay 5 Danish kroner. According to the Wall Street Journal, clients have already begun to leave the Danish bank. What will happen if other banks follow FIH, asks the rhetorical question of the newspaper Svenska Dagbladet today in its economic supplement.
Anticipating today's move by the Central Bank, two directors of large Swedish private banks have already spoken out on this topic and assured their clients that they - that is, all of us - will not have to pay to keep their money in the bank.
The two directors are Annika Falkengren from Svensk Enshilda Banken/SEB and Michael Wolf from Swedbank.
Mikael Wolf from Swedbank assured (in an interview with the Ekot newsroom) Swedish Radio that banks will do everything to protect their small depositors. Because otherwise, they - these depositors - will simply take their money from the bank and hide it, as they say, “under the mattress.” However, neither he nor his colleague Annika Falkengren can give any guarantees. No one can guarantee that the “negative rent” for banks will not turn into an equally negative rent for small depositors.
An expert on private economic affairs (microeconomics), Annika Creutzer, believes, for example, that “negative rent” will affect not only how and where people will store their savings, but also the level of wages. Here's how she explains the impact of this interest rate cut:
This means that when banks borrow money from the Riksbank, the Riksbank charges a fee for it. 0.1 percent. This means that banks will want to give us, clients, even more loans and credits, and these loans will cost us less. But there will be no interest on savings at all; this is a new situation for us. It is possible that we will also have to pay to open a savings account in a bank, says Annika Kreuzer, expert and journalist.
She describes inflation as the “lubricant” of the economy and explains its necessity in terms of paying for goods and services. The Riksbank's goal is to keep inflation low and stable. But now, due to growing concerns and turbulence in the global economy since December last year, the Riksbank is cutting interest rates and buying government bonds worth 10 billion crowns. The situation, however, is not unique to Sweden, says Annika Kreuzer:
This is an international problem. Sweden is a small country with an open economy, large exports and imports. We are influenced by what happens in the world. What is happening now in Sweden has already happened in Denmark and Switzerland.
Falling oil prices, problems in the eurozone, “limping” production growth in the US and the economic crisis in Greece - all this affects the Swedish economy. And it could be years before the situation changes, she said.
How will today's interest rate cut affect ordinary people? She answers this question:
I don't think there will be any changes in mortgage loans. But saving in a bank loses all meaning, because there is no interest on it. But it’s better to keep money in the bank, even if it doesn’t grow there, than at home under the mattress. Just for security reasons,” says Annika, meaning that you shouldn’t put yourself at risk of robbery or home theft if you hide money at home.
Annika Creutzer suggests that banks may increase fees for savings and savings accounts. There is little hope that interest rates on deposits will increase. But what is important, she emphasizes, is to check: does the bank have government guarantees for deposits? So that this money does not “melt” in the account over time.
As for the impact of a negative interest rate on wages, it assumes the following scenario:
It is likely that employers will say: since we are not paid more for our goods (i.e. there is no inflation), then we cannot raise wages. It is possible that for some categories of workers this will mean a reduction in wages, said Annika Kreitzer in an interview with our colleague Isabelle Swahn
Negative percentage
NEGATIVE PERCENTAGE
(negative interest) A deduction made by a bank or other depository institution for holding an amount of money for a specified period.
Finance. Dictionary. 2nd ed. - M.: "INFRA-M", Publishing House "Ves Mir". Brian Butler, Brian Johnson, Graham Sidwell and others. General editor: Ph.D. Osadchaya I.M.. 2000 .
Negative percentage
Negative interest is the interest charged by the bank for having a deposit account, applied to deposits of foreigners in national currency.
Negative interest is a fiscal measure used to restrict the inflow of foreign capital.
In English: Negative interest
Synonyms: Negative percentage
English synonyms: Interest charge
See also: Bank interest rates Deposits
Finam Financial Dictionary.
See what “Negative percentage” is in other dictionaries:
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Miles Kimball, an economics professor at the University of Michigan, spoke to CoinTelegraph about negative interest rates, the future of paper and electronic money, and the expected place of cryptocurrencies in the economy.
Interest in negative interest rates has grown significantly recently. They operate or have operated in Denmark, Switzerland, Germany, the Netherlands, Austria and Sweden. Some corporate bonds, such as Nestle and Shell, were also offered at negative interest rates.
What is a negative interest rate
A negative interest rate occurs if, having given your money to a bank or government, you receive back a smaller amount after some time. Essentially, you are paying the bank or government to temporarily manage your money. This strange situation occurs when many people who are very risk-averse seek a “safe haven” for their finances, and is usually the result of a large-scale recession in regions where there is virtually no economic growth (for example, the European Union).
CoinTelegraph: Why is it easier to introduce a negative interest rate with electronic money than with paper money? Can you explain how it would work with Bitcoin and e-dollars?
Miles Kimball: For money kept in a bank, introducing a negative interest rate is easy: just gradually reduce the account balance, even if no funds are withdrawn from it. On the other hand, paper money has specific numbers printed on it, so it is more difficult to impose a negative interest rate on paper currency. Among other things, this requires the use of an electronic dollar as a measure of value.
If the measure of value is the paper dollar, then the interest rate on paper currency is always zero (unless you tax paper money, which is much more difficult from an administrative and political point of view compared to an electronic monetary system). Thus, in order to be able to introduce a negative interest rate for monetary currency and other assets, the measure of value must be the electronic dollar. In this case, the central bank could impose a non-zero interest rate on fiat currency right at its own treasury level, where banks deposit or receive fiat currency into their accounts.
To conduct effective monetary policy, it is important that the central bank has control over the measure of value, and the electronic dollar as such may have many aspects of a cryptocurrency - perhaps enough to be considered a cryptocurrency.
As for private cryptocurrencies (like Bitcoin), they may well be a medium of exchange and a store of value, but monetary policy requires control over the measure of value. Central banks need to maintain control over the type of money that determines the measure of value - in this case, the electronic dollar. There are three key factors to ensure that the electronic dollar (or electronic euro, electronic yen, etc.) is used as a measure of value:
- requirement to calculate taxes in electronic dollars;
- accounting standards requiring accounting in electronic dollars;
- the need for coordination between companies, and between companies and households (similar to coordinated daylight saving time, but without anyone checking the clock).
C.T.: How can one introduce a negative interest rate in a cryptocurrency system?
MK: To be able to introduce a negative interest rate in a cryptocurrency system that uses Bitcoin or its equivalent for most transactions, the functions of a measure of value and a medium of exchange must be separated. This can be done with a non-Bitcoin e-dollar (it's also a good idea to have many different stores of value, but they're always available).
Currently, robots cannot conduct monetary policy as well as banks. Perhaps someday they will be able to do this, and then the responsibility for the electronic dollar can be placed on the computer. However, there will still be a need for a separation between the electronic dollar measure of value (controlled by a computer) and any asset that automatically receives a zero interest rate in its own terms (as Bitcoin currently does).
C.T.: Can Bitcoin be a currency? What do you think are its limitations?
MK: Bitcoin is already a currency, but it would be unwise to try to use it as a “full-fledged” currency. A good measure of value should have a constant value relative to goods and services, but Bitcoin is not like that. It cannot have a constant relative value without a much more complex emission control algorithm, far beyond the current capabilities of central banks. Designing and implementing good monetary policy is not easy.
The measure of value should be controlled by the institution best able to ensure its constancy across goods and services and, in the process, maintain the natural level of production in the economy. Currently these are central banks. Bitcoin's value fluctuates significantly relative to goods and services, and central banks (humans using computers) can so far manage monetary policy much better than the Bitcoin algorithm.
C.T.: Tell us about blockchain technologies in the context of central banks. What operations/tools is blockchain best suited for?
MK: I do not consider myself an expert on blockchain technologies, but it seems to me that they or developments based on them will be important to ensure the normal operation of electronic dollars. Electronic dollars include money in the bank, but they are very inefficient, their transaction fees are high, and banks will have to go the way of Bitcoin. Blockchain is a huge achievement that can significantly reduce the cost of processing transactions compared to modern banking methods. It will make electronic transactions much more efficient.
C.T.: What do you think about "currency wars» and their influence on central bank policies? Do negative interest rates have anything to do with them?
MK: “Currency wars” are mostly speculation and prejudice. If all countries follow an inflationary monetary policy, this is not a currency war, this is global inflation. Replace "currency wars" in everything you read with "global inflation" and you won't go wrong.
The only time the phrase “currency war” is justified is when a country sells its own assets and buys equivalent foreign assets. If all countries do this, their trades are partially canceled out, but if a country or its central bank buys assets at a higher interest rate than the assets it sells, it is a monetary expansion, not a strike in a currency war.
Of course, monetary expansion affects interest rates, but if another country is unhappy with this effect on its own interest rate, it should simply counter with its own properly calibrated expansion. Such a response is not a salvo in a “currency war”, but an element of normal monetary policy.
C.T.: What motivates central banks to introduce negative interest rates?
MK: The job of central banks is to ensure price stability and sustainable economic growth by maintaining natural levels of production. To do these two things well, you need to resort to negative interest rates at least occasionally.
The Fed, European Central Bank, Bank of England, and now the Bank of Japan are targeting 2% inflation over the long term because they have not yet added negative fiat interest rates to their toolkit. Willingness to introduce a negative rate makes it possible to reduce the target inflation rate to zero - to true price stability. Additionally, the ability to use negative interest rates helps nip a recession in the bud. I think these are big enough benefits that most central banks will eventually add negative interest rates on fiat currencies to their arsenal.
Miles Kimball, negative interest rate expert and electronic money advocate .
George Samman
The other day, a user of the well-known information and entertainment community “Pikabu” on the Runet reported that recently the German bank Solaris has been offering a negative interest rate of -5% per annum. That is, a client can take out a loan of 1,000 euros, and only need to pay back 948 euros.
We decided to find out how this is possible, and why such loan offers do not surprise anyone in Europe.
Why does the bank issue a loan with a minus rate?
The use of negative interest rates is no longer new in the global economy. The first country where banks began to “pay extra” to their clients was Japan. At the end of the last century, the government faced a long recession, which led to a decrease in consumer prices in the domestic market (deflation). The country's leadership decided to stimulate the economy by increasing public debt and negative interest rates.
Later, this practice began to be used by European countries. In 2012, the National Bank of Denmark established a negative rate on weekly certificates of deposit. At the same time, the European Central Bank began to actively reduce the base interest rate.
In June this year, the ECB once again set the interest rate at zero and the deposit rate at -0.4%. The deposit rate is similar in Germany. It is this indicator that banks focus on when setting rates on loans and deposits.
Therefore, the negative rate in the German bank Solaris is natural in the context of the pan-European policy of quantitative easing.
It is worth noting that loans with minus rates are not a general trend among German banks. For example, Noris Bank issues loans at a rate of 2.90%, but can also set a minus rate if necessary.
Solaris took advantage of the opportunity to attract new customers and obtain their data using a loan at a minus interest rate.
Loan with a negative rate from the German bank Solaris
According to the user who posted about this bank, in Germany there is high competition among credit institutions that find it difficult to find new borrowers.
The vast majority of Germans have an account in the bank where their grandfather and great-grandfather are,” he noted.
Therefore, Solaris management probably hoped to use a loan with a negative rate to find new clients among young people in the hope of further cooperation with them.
Have there ever been real cases when a bank paid its borrower?
In 2016, Danish man Hans-Peter Christensen, who took out a mortgage loan at a floating interest rate from a local bank, received 249 Danish kroner ($38) from his lender. Then, in the fourth quarter, the deposit rate was -0.0562% (now - -0.65%). Along with Christensen, other mortgage borrowers also received similar rewards.
In what other countries can there be a negative interest rate on loans?
In addition to Germany and Denmark, negative rates are now in effect in Sweden, Switzerland and Japan. For example, Switzerland recently set the deposit rate at -0.65%. However, we were unable to find loan offers with a negative rate on the websites of local banks. Just in May last year, Bloomberg reported that Switzerland's largest bank, UBS, would set a negative rate on deposits whose account value exceeds 1 million euros.
In Japan, the deposit rate is -0.069%. We know nothing about consumer loans with a similar rate, but mortgages in this country are issued at 0.5%.
The lowest rate among the above countries is in Sweden - -1.25%.
So are negative interest rates a good thing?
More likely no than yes. Negative rates themselves are a consequence of deflation caused by a prolonged recession in the economy. And deflation leads to a fall in aggregate consumer demand, a reduction in the amount of money in the economy and a decrease in the growth of its real value, which reduces the income of producers, forcing them to reduce production and fire workers. As a result, the state budget receives less taxes.
In turn, low interest rates are not attractive to investors, who in such conditions most often transfer their capital to other countries. Thus, even for banks it is easier and more profitable to invest in foreign assets with higher returns than to lend to the population at a low interest rate within their own country.
In addition, along with cheaper consumer goods, wages also become cheaper, and the purchasing power of the national currency in foreign countries decreases. At the same time, residents of countries experiencing deflation cannot compensate for the loss of value of their savings, since deposits in banks also have a negative rate.
All these processes unwind a deflationary spiral, which can provoke high levels of unemployment, a reduction in investment and output.
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On June 5, 2014, the European Central Bank announced at about 14.45 Latvian time that it was reducing all interest rates, including the deposit rate was reduced from 0% to a negative value of -0.10%. Such information caused a stir and even panic among non-specialists in financial markets. What does this interest rate mean and how does it relate to economic entities, i.e. to residents and non-banking businesses of Europe, including Latvia, without delving into the subtleties and complexities of regulating macroeconomic processes and the money supply?
The deposit interest rate, which is regulated by the ECB, refers to the interest rate on deposits that commercial banks create in the accounts of the central bank. Yes, commercial banks can not only borrow from a central bank, but also deposit excess funds with the same central bank. The higher the interest rate on deposits for commercial banks, the more interested the commercial bank will be in holding funds with the central bank. Why does a commercial bank put its funds on deposit and not lend to households and businesses? In a market economy, no one can force commercial banks to lend to households and businesses. The Central Bank can create comfortable conditions for commercial banks to lend to the population and businesses through the resale of loans taken from the Central Bank (naturally at a different price). If the risks are too high, then regardless of the central bank's policy, commercial banks will not lend to the economy. For example, experts in the United States note that the ultra-soft monetary policy of the US Federal Reserve is used by commercial banks not to lend to the economy, but to pump up speculative bubbles in financial markets. Another example is that now in Latvia commercial banks are very careful in lending, but back in 2006-2008 loans were distributed left and right. Therefore, until June, commercial banks could safely hold available funds on deposits with the central bank, receiving a small profit just above zero without any risks.
How to stimulate lending to the economy by commercial banks? One of the unconventional possibilities mentioned by the head of the ECB is the continuation of lowering deposit rates for commercial banks to negative values. This means that with negative deposit rates, a commercial bank will lose part of its money - currently at the rate of 0.1% per annum. For example, if a bank deposits 100 million euros for a year, then after a year the central bank will return 100 thousand euros less. Since a commercial bank is not interested in losing money so easily, it will be forced to withdraw its funds from the central bank. From the ECB's point of view, this should encourage commercial banks to do something with these funds, for example, start lending to households and businesses. It is naive to believe that all commercial banks will rush to lend en masse given such high risks of insolvency of the population, economic instability, etc. A commercial bank can hold excess money for a while (especially since the inflation rate in the eurozone is extremely low) and can sell the excess money to another commercial bank at a rate of EURIBOR plus minus, can issue a loan in another country if there is a network of branches abroad, etc.
How will a negative deposit rate affect the deposit rate for households and businesses in Europe and Latvia as well? In today's conditions, in principle, no way. The supply of commercial banks, although influenced by the policy of the central bank, is still independent. A commercial bank will never make negative deposit interest rates for households and businesses, because this will cause a massive outflow of deposits from the bank (who wants to lose money?), which will provoke, if not bankruptcy, then serious problems for the bank, especially if this bank has no more strong support from the parent bank. Any commercial bank is interested in attracting money from the public for subsequent investment in securities or resale of this money in the form of a loan to other interested parties. The rate on deposits for the population depends on many factors (competition among banks, inflation in the eurozone, the demand of commercial banks for liquidity, the amount of effective demand for loans, etc.) and not primarily on the rates on deposits for commercial banks. Very often, the deposit rate for households and businesses is at a level slightly higher or lower than inflation. Currently, deposit interest rates are already at very low levels. According to statistics Latvijas Banka The average rate on deposits in euros is about 0.39%, with annual inflation in the eurozone about 0.49% (for the month of May). The figure below shows the dynamics of the deposit interest rate for households and businesses in the European Union, as well as the dynamics of the ECB deposit rate for banks and the inflation rate over the past 14 years. As can be seen in the figure, the difference between deposit rates for households and banks is about 1.5-2%.
Source: ECB, EuroStat
Dynamics of the average deposit rate for households and businesses, the ECB deposit rate for banks and the inflation rate in the EU for the period from 1999 to 2014, %
Therefore, a negative rate on deposits for commercial banks can be noted by any resident of Europe, including Latvia, only as an amusing fact that does not mean anything. If we talk about deposit rates for individuals and businesses in terms of the level of profitability, then the deposit has never been and will not be a good source of increasing capital.
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