Are you used to receiving interest on the money you place with a bank? That was the norm before the financial crisis of 2008. That’s when central banks began experimenting with negative interest rates, a situation where the depositor pays for the privilege of keeping money in the bank. The intent was to allow banks to lend more money and thus stimulate the economy.
The central bank of Sweden was the first bank to drop its interest rates to minus .25 percent in 2009. This rate has not been raised since December of 2019 when the Sveriges Riksbank raised its interest rate by .25 percent and settling at zero percent.
According to Sveriges Riksbank’s governor, the implementation of negative interest rates had helped curb inflation and boost GDP. However, it would not be a good idea to continue these negative rates for a longer period of time. No one knows exactly how long negative interest rates may be beneficial, but other global central banks are showing little interest in raising their sub-zero interest rates. The concept of negative interest rates may continue to be embraced for some time to come.
Countries such as Japan, Denmark, Hungary, and Switzerland are expected to edge away from negative rates, but many of their neighbors are not. Since negative interest rates have been in effect for more than ten years, one can only assume that it is now being considered the “new normal.” In those countries that have clung to this new norm of less than zero percent interest, inflation and GDP have grown substantially and created odd situations. German bank depositors must pay to deposit their money; Danes are getting paid to borrow as mortgage interest rates fall below zero percent to minus 0.5 percent.
The U.S. Federal Reserve Bank has been reluctant to normalize negative interest rates. It has attempted to raise them only to cut them back again. As low as they are, however, they won’t hit sub-zero in the near future. The Fed has acknowledged that negative interest rates would distort and manipulate the overall financial picture. However, would the Fed adhere to this stand in the event of a serious economic fallout? Slashing interest interests has been the Federal Reserve fallback position during financially difficult times. Between 2007 and 2008, as the global financial crisis hit its peak, the Fed cut its 5.25 percent interest to zero and then to 0.25 percent. With today’s interest rate near zero, the Federal Reserve lacks the necessary wiggle room to adjust interest rates in the event of economic downfall and could result in interest rates slipping into the negative realm.
The purpose of low-interest rates is to stimulate the economy by making borrowing easier. However, reality has proven that financial instability has been the result of this policy instead of financial security. This is because easy borrowing invariably leads to increased debt. It is estimated that global debt has now exceeded $188 trillion.
German banks have been especially active in instituting and maintaining negative interest rates. Forty-one German banks have implemented this policy, some of them do so even on small accounts with deposits of 100,000 euros. This is double the banks that were charging negative interest rates last year. Even money market accounts are getting into the game, resulting in a negative yield for the depositors. While the European Central Bank is defending its decision to keep interest rates negative, it is also considering raising it to below 2 percent. However, it might take years for this to happen. This negative interest rate applies only to new, and not existing, customers.
Banks need to consider how much longer consumers are willing to pay them to hold their money. They may find that consumers find it more profitable to invest in valuable goods, such as gold, instead. Combining rising debt with negative interest rates will prove a risky economic combination.