European banks are offering negative mortgage rates. What do negative interest rates mean in practice? Why do banks need negative rates?

The Bank of Japan introduced a negative interest rate on new deposits that Japanese banks place with the Central Bank. This measure should stimulate economic growth

Central Bank of Japan building (Photo: AP)

On January 29, the Bank of Japan announced that it was introducing a negative interest rate on excess reserves, namely new deposits that lending institutions place with the central bank. The rate, which is now 0.1%, will drop to -0.1%. Reducing the deposit rate to negative values ​​makes it unprofitable for banks to place funds in the accounts of the Central Bank - instead of receiving income, they are forced to pay the regulator. It is assumed that in this case the funds, instead of going to the accounts of the Central Bank, will be invested in the economy.

The negative rate will only apply to those reserves that the Bank of Japan accrues to commercial banks during new rounds of repurchases of securities from the financial sector. Already existing reserves, which The Financial Times estimates amount to $2.5 trillion, will continue to carry an interest rate of 0.1%. Bloomberg writes that the new rules will take effect on February 16.

The Central Bank will also buy government bonds, securities of real estate funds, as well as exchange-traded funds in order to expand the monetary base.

Simultaneously with the introduction of a negative interest rate for part of excess reserves, the Bank of Japan maintained its securities repurchase program. It reaches ¥80 trillion ($666 billion) per year. Aggressive monetary measures are designed to stimulate inflation. The Bank of Japan intends to bring it to 2% per year - a level considered optimal for developed countries. According to the organization's forecast, this goal is achievable by the period between March and October 2017. In December 2015, the annual inflation rate was 0.2%. Rising inflation, in turn, should stimulate growth in the economy, which in Japan has stagnated in recent years and has only recently begun to show signs of recovery.

According to updated data, in the third quarter of 2015, the country's GDP grew by 1% in annual terms. But industrial production, according to statistics from the Ministry of Economic Development of Japan, decreased by 1.4% in December.

The Bank of Japan's ultra-loose monetary policy is at odds with the actions of the US Federal Reserve. In mid-December last year, the Fed raised its key rate for the first time in nine years. Prior to this, the Fed abandoned large-scale interventions in the securities market. Thus, the policy of “quantitative easing” (low key rate and repurchase of securities), which had been in effect in the United States since 2009, was completed.

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Silent Hill

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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.

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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...

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These are strange times for European borrowers. It’s as if they live in Through the Looking Glass, where all the rules of financial existence are turned inside out. How do you like a business loan at an interest rate of minus 0.1%? Yes, yes - banks now pay their borrowers extra for taking out loans. Of course, you have to pay additional fees, and they still make the loan traditionally paid. But the bank's remuneration now amounts to no more than a percent or two. The weirdness doesn't end there.

Investors provided Germany with about $4 billion of their funds. They provided it this week, knowing that not all the money would be returned - the same negative interest rates still rule the roost. And not only government bonds, but also the securities of individual corporations, the Swiss Nestlé, for example, became unprofitable for investors.

On the other side of zero

Of course, consumer and mortgage loans with negative rates are still a rare phenomenon, although some people are really lucky. While most banks are still considering their actions in the current circumstances, individual lenders have taken the actions of their central banks as a direct call. But depositors were much less fortunate - the negative rate turned out to be unprofitable for them, and now they have to pay the banks for using their deposits.

Negative interest rates in politics

Switzerland unpegged its franc from the euro, which sent markets into shock, while simultaneously cutting its key rate to negative. The Central Bank of Denmark reduced the rate as many as 4 times and in just a month. Now in this country the main rate is -0.75%. Sweden followed suit. And what’s going on in European securities markets is a topic worthy of economic research.

Back to consumers

Of course, all these incidents have not yet become widespread, and therefore depositors can still transfer their money to other banks. And bonds of emerging markets can still be an excellent alternative to European bonds.

In Russia, a fall in interest rates on loans is not yet expected. Therefore, businessmen also have to include the costs of servicing bank loans as other expenses. However, despite the rise in prices, business loans have not become more accessible - banks are still very demanding of entrepreneurs. But still

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 Rixbank, Sweden's central bank, was the first central bank in the world to introduce negative interest rates on bank deposits in July. The phenomenon is quite remarkable in itself, but at the moment it is more interesting because other countries that want to achieve an increase in lending volumes may follow Sweden’s example, writes the Financial Times.

The world's central banks are closely monitoring " Swedish experiment" Governor of the Bank of England Mervyn King hinted that his department may well follow the Swedish example, since the threat of a liquidity trap for the UK (money “stuck” in the banking sector and not flowing into the real economy) is too great.

“If there are no signs of an end to this trend in the coming months, the Bank of England may resort to negative interest rates. In essence, this is a fine for banks that refuse to issue loans,” said a representative of RBC Capital Markets John Reith.

However, the European Central Bank is unlikely to charge banks for deposits, experts believe.

Frightened by the financial crisis and the defaults of their clients on debt obligations, banks are in no hurry to issue new loans, but prefer to accumulate money. Deposits with the Central Bank are considered one of the safest options.

Previously, it was expected that Japan would be the first to resort to such a measure, however, even having reached the bottom of the crisis, the Bank of Japan did not dare to force banks to pay for placing deposits.

The Riksbank's key interest rate, the repo rate, is 0.25%, the rate on loans issued by the Central Bank is 0.75%, on deposits - minus 0.25%.

The most vocal supporter of negative rates in Sweden is the Deputy Governor of the Riksbank Lars Svensson, a recognized expert on the theory of monetarism, who works closely with the head of the US Federal Reserve Ben Bernanke, with whom they worked together at Princeton. However, in the United States, the possibility of introducing negative interest rates is almost not discussed, since the very idea of ​​this is alien to American economists, the article notes.

“There is nothing strange about negative interest rates,” says Svensson. He is convinced that for central banks it is a monetary policy tool like any other, they just need to know when to use it.

Experts note, however, that Swedish banks have traditionally not used the opportunity to place funds with the Central Bank as widely as in other European countries, so the effect of a negative rate is limited. In the UK, it will be more noticeable, since the volume of deposits of commercial banks with the Central Bank increased almost fivefold from March to the end of July - from 31 billion to 152 billion pounds sterling.