Explaining all about negative interest rates, why they exist and what they mean for the economy and home loans
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How can an interest rate possibly be negative, you may ask? Does this mean you have to pay a bank to deposit your savings? Many countries in the western world now have an official negative interest rate, so read on with Savvy to find out how negative interest rates work and what they might mean for you and your savings.
A negative interest rate is one which is set below 0% by a country’s central or state-controlled bank during a period of deep economic recession. It is a form of economic policy which is designed to encourage spending and lending rather than storing or saving money. It is an economic stimulus measure designed to stop deflation and encourage investment.
During the worst of the COVID-19 pandemic, many nations turned to negative interest rates to stimulate their economies, including the European Union, Japan, Switzerland, Sweden and Denmark.
Central reserve banks declare a negative interest rate to discourage commercial and retail banks from hoarding cash reserves. If these banks have to pay to store their money, which is the effect of a negative interest rate, they’re more likely to lend the money out to borrowers rather than keep it and lose money. This acts as a stimulus to a country’s economy and encourages companies to invest in growth, which in turn counters deflation and encourages inflation. If money is cheap to borrow, more companies can afford to borrow money to fund their expansion, which in turn creates jobs and reduces unemployment.
A negative interest rate benefits borrowers who are looking for a home loan, because it means that retail banks can lend money more cheaply. The effects of very low interest rates are felt by retail customers as the intensity of competition between home loan lenders heats up, resulting in lenders offering highly competitive home loans with very low interest rates starting with the number one. In addition, there are now no-fee mortgages, loans with no account-keeping fees, cashback offers to encourage borrowers to refinance, and many other financial incentives to gain new customers.
This is difficult to predict, as Australia has never experienced a negative interest rate (although the current rate of 0.1% is almost as close to zero as possible). The only experience to draw on would come from Denmark, where that country’s third largest bank, Juske Bank, began offering a 10-year fixed interest loan at -0.5% in 2019. Questioned about how this would work, the bank said borrowers would still have to make a monthly repayment as usual, but the amount they owed would be reduced each month by slightly more than the borrower’s repayment amount. However, if fees and charges are added back in to the cost, the borrower will still end up paying the bank to borrow its money.
Probably not – Reserve Bank of Australia (RBA) Governor Phillip Lowe considered a negative interest rate for Australia in 2019, but discounted the idea. In a speech to the Australian Parliament in August 2019, Dr Lowe said: “I acknowledge that lower interest rates do hurt the finances of the many Australians who rely on interest payments…” Australia’s interest rate has been below one since October 2019, but as inflation increases during 2021 and 2022 the prospect of the RBA increasing interest rates becomes more likely into 2022 and 2023. As of February 2022, the RBA chose to leave Australia’s official cash interest rate at 0.1%.
A low or almost zero interest rate also benefits visitors to a country, because a low interest rate usually results in a weak currency, which means tourists visiting Australia will get more Australian dollars in exchange for their own currency. This could mean a boost for tourism, because as international borders are reopened, more visitors may choose to holiday in Australia due to a lower exchange rate.
Exporters can also benefit from a lower Australian dollar, as it means that Aussie goods seem cheaper to foreign buyers, which in turn could lead to an increase in exports from Australia to the rest of the world.
As companies and manufacturers expand their production with the help of cheap loan money, they create more jobs, which in turn results in a reduction in unemployment. This benefits the unemployed, who in turn spend their increased income on goods and services, which further stimulates the economy and leads to increased inflation, and eventually increased wages.
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
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© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
We’re partnered with lenders, insurers and other financial institutions who compensate us for business initiated through our website. We earn a commission each time a customer chooses or buys a product advertised on our site, which you can find out more about here, as well as in our credit guide for asset finance. It’s also crucial to read the terms and conditions, Product Disclosure Statement (PDS) or credit guide of our partners before signing up for your chosen product. However, the compensation we receive doesn’t impact the content written and published on our website, as our writing team exercises full editorial independence.
For more information about us and how we conduct our business, you can read our privacy policy and terms of use.
