Negative interest rates represent everyone big problem for the European Central Bank. Experience shows that such a monetary policy measure can be successful under some conditions and ineffective under others. The ECB has to offer one instrument to countries with different sets of determining factors.
Bankers, especially in Germany, are already complaining that negative rates wipe out their profit margins. Insurers and depositors are dissatisfied with the minimum payments for savings and savings instruments. However, in view of the ongoing stagnation in the eurozone economy, a number of experts are calling on the monetary authorities not only not to curtail their ultra-loose monetary policy, but also to lower negative rates even lower, and also to expand the list of assets to be redeemed. "With any side effects can be managed, they are not significant enough to justify indecisiveness" in monetary policy, says a report by the International Center for Monetary and Banking Research and Analysis Center economic policy(they annually prepare the so-called “Geneva reports” on the situation in the world economy). The Financial Times writes about this.
While the debate between supporters and opponents of negative rates has become increasingly emotional, in practice their effectiveness depends on factors specific to a particular economy. Among them, the following are especially important: methods of bank funding, the ratio of private and public pensions, the stability of the national currency and the share of cash in money circulation.
Since 2012, central banks have introduced negative rates in seven regions - Denmark, the eurozone, Switzerland, Sweden, Bulgaria, Japan and most recently Hungary. In Denmark, for example, some mortgage borrowers Now they receive money from banks every month, rather than paying them interest, while in a number of eurozone countries the positive consequences for ordinary consumers are much less pronounced.
Negative rates have helped weaken the Swedish and Danish crowns, supporting those countries' exporters, but the same has not happened in Japan: the yen continues to attract capital from abroad because investors continue to view it as a safe haven.
In Germany, Italy, Portugal and Spain, bank funding is heavily dependent on attracting retail depositors, making it more difficult for credit institutions there to maintain profit margins. It's not easy for them to cut deposit rates too much or even charge money for holding funds. Banks are already facing an outflow of funds. In Germany in lately Demand for safes from individuals has increased significantly, according to their manufacturer Burg-Waechter. It's not worth keeping money in a bank and paying for it, 82-year-old Hamburg retiree Uwe Wiese, who recently transferred 53,000 euros, partly including his corporate pension, into a safe at home told The Wall Street Journal. And the reinsurance company Munich Re previously announced that it would put more than 20 million euros and a stock of gold bars created two years ago into storage.
Scandinavian banks have a small share of deposits in funding, while banks in France and the Netherlands have enough wide circle sources of financing.
Another problem is that near-zero rates make it difficult to accumulate the assets that should provide retirement income. This could lead people to act opposite to what the ECB expects - saving more rather than spending. That's why Bank of England Governor Mark Carney said he is "not a fan" of negative rates. In the UK, most people rely on private pensions, as in the US. Fed Chair Janet Yellen also recently made it clear that, together with her colleagues, she would prefer to observe from the sidelines the actions of the ECB and other central banks experimenting with negative rates.
And in continental Europe, where most pensions are paid government schemes, we can expect the opposite effect than in the UK, says Guntram Wolff, director of the Brussels think tank Bruegel. It is easier to pay pensions from current income with an ultra-loose monetary policy that stimulates employment and economic growth; This could ease people's concerns about future pension payments, the FT quoted him as saying.
Another important factor– volume of cash: if there is a lot of cash in the economy, negative rates of central banks and their further reduction have a limited impact. In Sweden they are effective because it is already an almost cashless economy: cash in circulation there is less than 2% of GDP. In Switzerland, this figure exceeds 10% of GDP, and it is relatively cheap to store cash, since there is large bills at 1000 francs. The authors of the Geneva report admit that the abolition of cash is now practically or politically impossible. “But one day we may live in cashless economies... and central banks will be able to push negative rates as low as necessary to stimulate a recovery from recession,” they write.
Investor Gary Brown once proposed a simple investment portfolio, which will protect against any ups and downs in the economy: 25% each in money, stocks, bonds and gold, recalls Tim Price, investment director at PFP Wealth Management. For more than 40 years, such a portfolio served faithfully, helping to survive even the stagflation of the 1970s without losses. "But even in nightmares Brown couldn't imagine what central banks would do to cash and bond holders, rendering 50% of the portfolio useless for preserving capital and generating income, Price points out. And “neo-Keynesian economists advocate for the abolition of cash precisely for the sake of establishing negative rates,” he believes.
A series of economic crises has forced the population of the entire planet to be more careful about their funds and manage them wisely. This trend is characteristic not only of ordinary consumers, but also of organizations.
As a result, many purchases began to be made more prudently and demand began to shift from expensive products from developed countries to cheaper products from developing countries. This trend could not be ignored by economic representatives of developed countries.
If earlier in countries with developed economies aimed at exporting their products, the authorities provided subsidies and other forms of support for domestic production, over time these measures ceased to bring the desired result.
However, instead of explicit state support In such countries, a “negative refinancing rate” begins to appear. If there is such a rate level, we can say that the state is no longer able to ensure the influx of investment into the economy through own funds. As a result, the regulator introduces a negative interest rate that is unacceptable to the “free market logic.”
Such an aggressive and irrational policy of the economic regulator forces individuals and legal entities Instead of accumulating money supply, resort to risky investments. In the medium term, these measures can ensure certain growth and obtain certain benefits. However, government monetary policy in developed countries continues to become more and more “soft”, although it does not help much to correct the situation.
The reason for this trend is the limited sales markets. At the beginning of the 20th century, this was called the “crisis of overproduction,” but it is a crisis only for those countries that are not able to sell their products at the same price level.
IN in this case we can say that the market has been completely saturated with goods and in order to maintain, and even more so increase, its market share, it is necessary to reduce its price. If in developing countries products, a priori, are cheaper due to the low costs of their production, then in developed countries there is nothing left to do but to artificially stimulate their economy “by a veiled-directive method” using a negative refinancing rate, which, at the same time, promotes stopping the growth of the national currency. As a result, goods become cheaper on world markets.
The negative dynamics of the refinancing rate can be noted in a number of European countries, whose markets have long been “saturated”, and in order to gain additional advantages over foreign competitors in conditions of economic instability, they have to focus not only on the quality of the product, but also on the price of the product.
As a result, many countries with developed export economies, in order to prevent their stagnation, are forced to pay extra for their further development. In Switzerland and Denmark, the interest rate of the economic regulator has already amounted to -0.75%, in Sweden - -0.25%, on average in the Euro zone it is -0.2%. Israel and the United States are also close to negative rates.
For the Americans, judging by the recent speech of the head of the Fed, nothing seemed to have changed, but all investors were expecting an improvement in the situation in the largest economy in the world. In addition, they saw a hint of the possibility of further easing of monetary policy, which caused many to noticeably concern about financial stability in this country. As a result, even the previous rate increase by the American regulator could not stop the increase in demand for “anti-stress assets” in the form of precious metals.
Apparently, the United States is trying to organize a new transatlantic economic union precisely in order to ensure its products additional benefits and capture a significant share of local markets. However, this solution will not be able to solve the problem and, as a result, their rate will come to negative values.
A negative refinancing rate is so contrary to financial logic that even programs servicing credit transactions in banks sometimes fail. Although this measure is positioned as a “cure for deflation,” in the end it does not cure, but only delays the moment of a new global “crisis of overproduction.” It is planned due to the stagnation of developed world economies, which is pushing them to try to capture new markets.
Andrey Solovey, Economic Review
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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 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 of 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 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 force 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 are also becoming cheaper, and the purchasing power of the national currency is also decreasing. foreign countries. At the same time, residents of countries experiencing deflation cannot compensate for the loss in the 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.
In means mass media There is more and more talk about negative interest rates. How effective this approach can be, since there is great uncertainty about the consequences for commercial banks, organizations and other economic entities and their behavior.
Many developed countries around the world are entering the realm of negative interest rates. Five central banks - the European Central Bank (ECB), the Danish National Bank, the Swiss National Bank, the Bank of Sweden and the Bank of Japan - have already introduced negative rates on commercial bank funds held in deposit accounts at the central bank. In fact, commercial banks must pay to store their funds with central banks. The main goal of these decisions is to stimulate economic growth and combat low inflation and the growing threat of deflation.
Why use negative interest rates?
In simple terms, with negative rates, a depositor, such as a commercial bank, must pay the central bank to store funds at the government-owned central bank. What is the purpose of such a policy? Once banks had to pay to hold their cash, they would be incentivized to lend out any additional cash businesses and individuals, fueling the economy. Another example would be a depositor (such as a large company) who must pay to hold funds with a commercial bank if the latter uses negative rates. In this case, one goal would be to encourage companies to use the money to invest in businesses, again to increase economic growth. That is, negative rates imply that lenders pay borrowers for the privilege of making loans. However, this would be an extreme case at the commercial bank level, since the economic logic of lending is to earn interest in exchange for taking on the borrowers' credit risks. However, borrowing is limited by the use of negative interest rates, and the goal is to promote consumption, one of the main engines of economic growth. So far, the listed goals and intentions for negative interest rates are very theoretical, and there is uncertainty about their implementation in practice.
Eurozone example
In the eurozone, the central bank's goal is to stimulate economic growth and increase inflation. The ECB must ensure price stability by keeping inflation below 2%, and at the same time as close to this figure as possible, over the medium term (currently inflation in the eurozone is slightly below zero). Like most central banks, the ECB influences inflation by setting interest rates. If the central bank wants to take action against too high level inflation, it basically raises interest rates, which makes borrowing more expensive and makes saving more attractive. Conversely, if he wants to increase inflation that is too low, he lowers interest rates.
The ECB has three main interest rates at which it can operate: margin lending for providing overnight loans to banks, main refinancing operations And deposits. The prime refinancing rate or base interest rate is the rate at which banks can borrow regularly from the ECB, while the deposit interest rate is the rate that banks receive on funds deposited with the central bank.
With the eurozone economy recovering very slowly and inflation close to zero and expected to remain well below 2% for a long time, the ECB decided it needed to cut interest rates. All three rates have been falling since 2008, with the most recent cut being made in March 2016. The prime rate was cut from 0.05% to 0%, and the deposit rate went further into the negative from -0.3% to - 0.4%. The ECB confirms that this is part of a set of measures aimed at ensuring price stability over the medium term, which is a necessary condition for sustainable economic growth in the euro area.
The deposit rate, which has become even more negative, means that eurozone commercial banks that deposit money with the ECB must pay more. The question may arise – is it impossible for banks to avoid negative interest rates? For example, couldn't they just decide to hold more cash? If the bank keeps more money than required for minimum reserve purposes, and if he does not want to lend to other commercial banks, then he has only two options: keep the money in an account with the central bank or keep it in cash (of course, the most expected option by central banks is that banks will increase business lending and individuals). But storing cash is also not free - in particular, the bank needs a very secure storage facility. Thus, it is unlikely that any bank would choose such an option. The most likely outcome is that banks will either lend to other banks or pay a negative deposit rate. Between these two options, the second one looks more realistic because in at the moment Most banks hold more money than they can lend, and it is not necessary to borrow from other banks.
The opposite effects of negative rates
While central banks intend to boost economic growth and inflation through negative interest rates, such policies are becoming increasingly unusual and raise questions worth considering. Below are some of the main pros and cons.
Firstly Given that central banks' intentions are being met and negative interest rates are stimulating the economy, this would be a positive sign for the banking sector. If markets believed that negative interest rates improved long-term growth prospects, this would increase expectations of higher inflation and interest rates in the future, which is beneficial for banks' net interest margins (commercial banks make money by taking on credit risks and charging higher interest on loans than they pay on deposits - in this case they have a positive net interest margin). Moreover, in a stronger economy, banks would be able to find more profitable lending opportunities, and borrowers would be more likely to be able to repay those loans. On the other hand, negative interest rates could harm the banking sector. If the lending rate is constantly kept lower due to falling interest rates, and commercial banks are unwilling or unable to set the deposit rate below zero, then the net interest margin becomes smaller and smaller.
Secondly, a negative interest rate policy should encourage commercial banks to lend more to avoid central bank charges on funds that exceed reserve requirements. However, for negative rates to encourage more lending, commercial banks would have to be willing to make more loans at lower potential earnings. Since negative interest rates are introduced as a counterbalance to slow economic growth and the risks of deflation, this means that businesses need to solve problems arising in this area and, as a result, banks face increased lending when lending. credit risks and reduced profits at the same time. If profit levels suffer too much, banks may even reduce lending. Moreover, the difficulty of setting negative rates for savers could mean higher debt costs for consumers.
Thirdly, negative interest rates also have the potential to weaken a nation's currency, making exports more competitive and increasing inflation as imports become more expensive. However, negative interest rates can trigger a so-called currency war - a situation in which many countries seek to deliberately reduce the value of their local currency in order to stimulate the economy. A lower exchange rate is clearly a key channel through which monetary easing operates. But widespread currency devaluation is a zero-sum game: world economy cannot arrange a devaluation of money for itself. In a worst-case scenario, competitive currency devaluation could open the door to protectionist policies that would negatively impact global economic growth.
Fourth From an investors' point of view, negative interest rates could, in theory, serve the same function as cutting rates to zero - this could be beneficial for exchanges, since the relationship of interest rates to the stock market is quite indirect. Lower interest rates imply that people looking to borrow money can enjoy lower interest rates. But it also means that those who lend money or buy securities such as bonds will have less opportunity to earn interest income. If we assume that investors are thinking rationally, then falling interest rates will encourage them to take money out of the bond market and put it into the stock market.
But in practice, this particular policy of negative interest rates may not be so useful. Investors may view negative interest rate policies as a sign of efforts to sort out serious problems in the economy and remain risk averse. Also, the use of negative interest rates will not necessarily encourage commercial banks to increase lending, which will make it more difficult for financial companies to make profits in the future and harm the performance of the global financial sector. Problems in the financial sector are very sensitive for the entire stock market, and they can weaken it. And even if commercial banks wanted to increase lending, success in encouraging businesses and individuals to borrow more money and spend more is questionable.
Fifthly, negative rates could complement other easing measures (such as quantitative easing) and signal to the central bank the need to address the economic slowdown and missed inflation target. On the other hand, negative interest rates could be an indicator that central banks are reaching the limits of monetary policy.
Main conclusion
Central banks are determined to do everything possible to increase economic growth and inflation. With interest rates already at zero, everyone larger number Central banks resort to negative interest rates to achieve their goals. However, this is a relatively new tool for them, and the main opportunities and risks of such a policy have not yet been realized. Therefore, it is worth taking a closer look at and monitoring the unintended consequences of these increasingly popular policies. Currently, the eurozone economy is gaining momentum slowly, inflation is low, commercial banks are in no hurry to increase lending volumes, but instead are looking for other ways to reduce the potential damage to profits, the desire of businesses and individuals to take out more loans at a lower interest rate is growing quite slowly, investors are not rush to take on more investment risks, bond yields remain at record lows. Negative interest rates will take longer to realize the full impact.
Gunta Simenovska,
Head of Sales Support Department, Business Development Department, SEB Bank
Sources: European Central Bank, World Bank, Bank for International Settlements, Nasdaq, Investopedia, Bloomberg, BBC, CNBC
The Russian banking community came up with the idea of introducing negative interest rates on deposits in foreign currency. The Central Bank did not support the initiative. As a result, banks may refuse to accept deposits in euros from the public.
Why is the Central Bank against
Commenting on its decision, the Central Bank gave two arguments. Firstly, “the practice of establishing negative rates exists only in certain eurozone countries and for individual transactions”; secondly, it could “lead to the accumulation large volumes foreign exchange liquidity outside the banking system,” that is, to the growth of the shadow foreign exchange market.
The Central Bank may have other reasons to object to the introduction of negative rates on client foreign currency funds, bankers say. “In addition to the business component, there is an image component. Many clients, especially individuals, may perceive negative rates negatively,” says Andrey Stepanenko, deputy chairman of the board of Raiffeisenbank. Sberbank chief analyst Mikhail Matovnikov agrees that “the emergence of negative rates is quite a serious negative.”
The banking community can solve the problem on its own. It is easier for bankers to stop attracting liquidity in euros by removing the corresponding deposits from their product line for individuals, market participants indicate. “As for individuals, the solution may be to stop attracting new deposits in euros,” Stepanenko told RBC, adding that Raiffeisenbank is considering this possibility. In his opinion, other players may also choose this strategy. As a result, Russians' ability to diversify their savings will decrease.
However, so far in the banking community there is no consensus on this score. Sberbank and Citibank declined to comment on plans for rates. “As for VTB24 and the retail business of VTB Bank, in the near future we will adjust the profitability foreign currency deposits is not planned,” said a representative of VTB Group.
It will be more difficult for banks to follow the same path in relation to legal entities. “Good corporate clients are critical for most banks, and no one will refuse them due to losses on attracted euros. Banks will have to solve this problem by improving the functioning of their treasuries,” a manager at one of the banks included in the top 30 in terms of assets told RBC.
In his opinion, the problem did not appear yesterday, but with proper management of liquidity flows, it can be resolved. “Most likely, the association’s appeal to the Central Bank was caused by a surge in the influx of liquidity in euros from clients of some specific banks, which they quite reasonably supported with a reference to the general difficult situation on the market.”
It is possible, notes RBC’s interlocutor, that in recent months the situation has been aggravated by Russian companies accumulating foreign currency in their accounts, including euros, to pay external debts. In the first quarter of 2017, according to the Central Bank, these payments should amount to more than 15 billion in dollar equivalent.
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