Could Australia get negative interest rates?
The world economy is in totally uncharted territory.
Last week central bankers from around the globe met in Jackson Hole, Wyoming, USA and tried to chart a path forward into the unknown.
Like a ship’s master and commander ‘on the far side of the world,’ contemplating the possibility of the finding the edge of the known universe, the bankers are discussing what might happen if interest rates go UNDER zero per cent.
Japan, Sweden and other countries have flirted with the edge of this virgin monetary policy territory but now policymakers are talking about blazing a new trail straight into the heart of this rates darkness.
The Reserve Bank of Australia’s governor Dr Philip Lowe told a parliamentary committee in early August that he was prepared to take rates to zero.
“It is possible we end up at the ‘zero lower bound.’ I think it's unlikely but it’s possible.”
Sweden took its’ official rates under zero in 2010 following the global financial crisis and again in 2014.
Denmark, Switzerland and Japan have also gone under the ‘zero lower bound’ as Philip Lowe calls zero per cent rates.
Negative rates are supposed to encourage banks to lend money and for businesses and households to borrow to invest and spend.
But if depositors have to pay interest to their bank, rather than be paid interest surely they will withdraw their savings from the banking system.
They may even hoard their savings in cash under the mattress.
That could be disastrous for our economy which depends on money flowing around and being available for lending, investment and consumption.
Australia’s Macquarie Bank issued a research paper recently arguing against negative rates as a tool for monetary policy.
“Contrary to the intent, negative interest rates are likely have a negative effect on economies,” said Macquarie’s research paper.
Negative rates would act like a tax on banks, forcing them to pay the Reserve Bank to hold their funds.
This tax on banks might force them to raise loan rates or slash deposit rates to pay for the additional business cost.
And because business investment is more closely linked to confidence than cost of funds, negative rates could actually damage lending and investment said Macquarie.
Savings account interest rates have fallen to under two per cent for many accounts but savers can still find accounts with ongoing maximum bonus rates up to around 2.5 per cent.
The most competitive term deposit rates are also around the 2.5 per cent mark.
Read more about the possibility of rates going negative in InfoChoice’s History of Interest Rates feature.
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