Before you understand how they work and why negative ones are needed interest rates, you need to understand the very understanding of what it is.
A negative interest rate is a real interest rate set by the bank in conditions of inflation and equal to the difference between the announced rate and the inflation rate that exceeds it. And speaking in simple words– this is the percentage that the bank withdraws from the owners’ clients deposits for allowing the bank to use their personal funds.
Who would agree to this? What is this for? The answer is quite simple and prosaic. When a situation arises in a state's economy in which the rise in inflation is so high that holding cash threatens to lose most of the money, people begin to look for least risks for yourself and your finances. Such situations have already been observed in regions where weak economic growth prevails, for example, in the countries of the European Union. Thus, when looking for security for their savings, people come to the conclusion that they either need to agree to the bank's terms, paying a negative interest rate on their deposits, but at the same time keeping their savings in a larger volume than if they kept them in cash. Or switch to alternative money substitutes, such as gold, silver, diamonds, real estate and antiques, futures, stocks and bonds.
At the same time, it is beneficial for the banking system of any country that people do not save their funds and accumulate them, but constantly spend them, which will lead to an increase in the issuance of loans, and therefore the profitability of banks. A similar situation can be observed in the United States, when a prolonged decline in the economy leads to citizens taking out less and less loans and increasingly trying to save money in order to have a reserve of personal funds in case of unforeseen situations or “hard times”. Having low profitability compared to previous periods, banks are losing a lot and are trying in every possible way to encourage people to use credit system. It is clear that when the banking system collapses or decreases in profitability, the economy of the entire country also suffers, since the banking sector is one of the most profitable sectors of the state. This is why introducing a negative rate is very beneficial for banks.
Let's look at an example: if a bank accepts deposits at -6% per annum, but issues loans at -2%, then in any case it will always remain in the black by 4%, which will naturally go into the pockets of bankers and the state. Thus, we see that regardless of whether the rates are positive or negative, the bank always remains in the black.
But how to get people to agree to such conditions? After all, no one wants to lose their money even in small quantities, much less pay the bank for storing your savings. It would be much easier to keep this money at home without any interest rates and headaches.
The answer is outrageously simple. We need to make sure that the population has no other choice, and they voluntarily go to banks to give their money. This can be achieved by artificially creating an increase in inflation by raising prices and devaluing paper currency. Another lever of such management is the depreciation of the currency compared to the main units - the euro and the dollar. Then, seeing that their personal savings are depreciating very quickly, people are forced to either invest them in something that has a permanent value, for example: real estate, precious metals, securities and the like. Or humbly go to the bank and give them your money for safekeeping, paying a negative interest rate for this.
The practice of introducing negative interest rates is already widely used in European countries. For example, in Denmark in 2012, the interest rate dropped below zero to the level of -0.75%, maintaining this trend, and by October 2015 its level had dropped to -0.9%. And according to the forecasts of economists and financiers, this trend will continue until 2017. Switzerland followed the same example, maintaining the level of its negative rates at -0.75%. Sweden settled at -0.35%. The purpose of such policies in Denmark and Switzerland was to reduce the incentive for foreign clients to keep money in their bank accounts. High level The influx of foreign capital began to stimulate the national currency, and its rate increased greatly in relation to the euro. Sweden is pursuing one single goal - inflationary pressure on the population.
Based on the results of this policy, it can be called successful: Denmark was able to keep the national currency from falling further against the euro. Switzerland was also able to stop this process and today the franc is successfully trading within the usual and acceptable range of exchange rates. Sweden has not yet achieved great results, and the inflation situation remains quite unstable, but financiers predict a successful outcome of this monetary policy.
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 away from expensive products developed countries to cheaper developing products. 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 Federal Reserve, nothing seemed to have changed, but all investors were expecting an improvement in the situation in the world’s largest economy. 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 provide its products with additional advantages 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.
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%. Reduction of 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 economic growth, which in Japan is recent years stagnated and only in lately began 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.
At first glance, the policy of negative interest rates (NIRR) looks like a paradise for both the population and business.
Which of us would refuse a loan at, say, two percent per annum? If you take out a mortgage at this percentage, and even for 30 years, it turns out that buying an apartment will cost much less than renting. It would seem how great it would be to live in the West, where mortgages are often issued at such low rates!
Experience, however, has shown that low interest rates have worked in the opposite way in the United States and Europe, making housing unaffordable for record highs. large number citizens.
The “paradox” is explained simply: the lower the loan rate, the more citizens can spend on apartments. Since apartments limited quantity, their prices are rising. Well, as prices rise, buyers with average incomes find themselves left out, since not every American can afford to buy a house made of sawdust for a million dollars.
To illustrate the problem, it is enough to mention a couple from San Francisco who semi-legally rent out container cabins to those residents of the city who do not have two or three thousand dollars to rent at least some apartment. For the opportunity to live in a metal container, the unfortunate people pay $600 a month.
Low interest rates and pension funds are killing: you can now invest money in reliable dollar securities only at zero percent per annum. This, of course, is not enough for normal functioning, so pension funds in the USA we now have to either cut pensions or play gambling, investing, for example, in bonds of Tajikistan and Ecuador.
However, the real sector of the economy fares the worst. It would seem that cheap loans are a businessman’s dream: you can quickly expand production and easily close any cash gaps. However, in practice, it turns out the same way as with a mortgage: it turns out that cheap loans are only good if you have access to them, and your competitors do not.
A capitalist economy operates through a few simple mechanisms, the main one being competition. Bad businessmen suffer losses and leave the market, leaving the best on the playing field: those who make dollars and ten cents out of a dollar every year. Banks should speed up the process of selecting the best by providing loans at 6-12% per annum.
This system of natural selection worked well in the United States until the turn of the millennium, and the country’s economy developed especially well in the early 1980s, when loan rates jumped in places to as much as 20% per annum. Unfortunately, after the dot-com crisis, the US Federal Reserve decided to lower lending rates to almost zero, and market mechanisms that had worked for centuries began to jam.
Let's imagine two businessmen, John and Bill. John works normally, receiving his few percent of profits and looking confidently into the future. Bill doesn't know how to work, he only has losses. At normal lending rates, Bill would have gone bankrupt pretty quickly and cleared the market for John. However, now Bill can take out a loan from a bank at a very low interest rate and... continue to work at a loss. In two or three years, when the money runs out, take out another loan. And then another and another, thereby delaying their bankruptcy indefinitely.
A skillful businessman, John is forced, willy-nilly, to follow Bill: to reduce prices below the level of profitability, so as not to lose customers in this unhealthy market. As an example, we can point to American shale producers, most of whom, at normal lending rates, would have gone bankrupt long ago, thereby returning oil prices to a healthy level of $100 or more per barrel.
Let's add to this unsightly picture monopolies and oligopolies, which cheap loans allowed to grow uncontrollably, and the portrait of the disease will perhaps become complete.
We observed something similar in the USSR in the 1970s and 80s. The Soviet authorities did not have enough political will to close inefficient enterprises, and they gradually degraded, producing products of lower quality and less and less in demand by the economy. The hothouse conditions led to a logical result: when, after the collapse of the USSR, domestic industry was thrown into the arena with the capitalist tigers, during the first years it was practically unable to provide them with worthy resistance.
Exactly the same thing is happening now in the West. Of course, the central banks of the United States and the European Union are well aware that POPS is a dead end, but it is no longer possible to return back to healthy capitalist lines. Raising interest rates to a level of at least 5% per annum is guaranteed to kill businesses that have become hooked on cheap loans.
Unfortunately, this problem no longer has a good solution. If the USSR had at least a theoretical opportunity to follow the example of China by gently reforming the economy (instead of handing it over to the slaughter of pro-American reformers), then our Western friends and partners simply no longer have such an opportunity. Printing presses They have issued so much money over the past 15 years that it is unlikely that it will be possible to get out of the crisis without massive bankruptcies and hyperinflation.
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Negative rates became a reality in the modern financial world a few years ago. Dreaming of financial stability, many Russians do not even imagine what amazing (in our opinion today) forms it takes on in prosperous countries. There, in an almost inflation-free economy, depositors sometimes do not receive income from their bank investments, but on the contrary, sometimes they themselves pay the bank for the service of storing money in an account. Will he get there? new reality to Russia, and under what conditions will this become possible?
Bold experiments
Actually, human history I already knew the times when, when accepting capital for storage, its “guardian” took a fee from the owner for his deposit services. This is how banking began many centuries ago, when gold was the only reserve currency. Already in our time, the German economist of the early 20th century Silvio Gesell was the first to theorize the idea of negative deposit interest at the state level. His free money model assumed a small regular payment by citizens to the state for the issue of money (as a fee for a government service). However, the loan interest was completely reset to zero. Money, thus, ceased to serve as a store of value, accelerating its turnover in the economy.
And although a completely successful practical experiment “according to Gesell” took place on the territory of several Austrian cities in the 30-40s of the last century, yet modern economists 10 years ago considered it unthinkable that negative rates would become a reality of the 21st century. The idea of financial demurrage still makes many people twirl their fingers at their temples. In the minds of most of us best case scenario at least a zero rate is required. However, the national bank of Sweden, the Riksbank, in 2009 became the first modern central bank that began to charge its ward credit institutions a fee for money accepted from them into correspondent accounts, i.e. thus introduced a negative deposit rate at minus 0.25% per annum. Which, however, did not yet mean an unambiguous and immediate extrapolation of negative returns on bank deposits for citizens and corporations.
Countries and rates
Since then, the Swedish model has been gradually adopted by the Central Banks of other economically developed countries, which, after observing a little of the pioneer, in 2012-2016 began to introduce extraordinary methods at home. Negative rates have already been tried (following Sweden) by Switzerland, Japan, and Denmark. However, their key rates do not stand still, they change (in Russian opinion, almost imperceptibly - by hundredths or tenths of a percent), sometimes popping up to a positive level just above zero.
If we talk about the experience of the pan-European ECB, then two years ago it lowered its deposit rate for the first time from 0% to minus 0.1%, while simultaneously maintaining the base rate within the range of 0.15-0.25%. Positive bank rates in Canada, the USA, Great Britain, Norway are still hovering around zero... Their regulators are only looking closely at the experience of others. At the same time, there are already American and European government bonds with negative yields (it turns out that investors pay extra to governments for storing their capital). Looking back a little, we will see that the Japanese regulator, long before the Swedish innovations, kept its deposit interest at the lower level of 0.1% for several years in a row in 2001-2006, without even thinking that it would ever enter the negative zone.
Why does the government need negative rates?
What is the reason for such an amazing interest rate policy? Do Western banks really have so much money that they decided to turn depositors against themselves and bribe borrowers with a small commission, instead of earning money on loan interest? After all, the policy of negative interest rates of the Central Bank is not immediately, but gradually transferred to relations between commercial banks and their clients.
To understand, let us remember the conditions under which the Swedish Riksbank began its bold experiment. 2009 is the year of the ongoing global financial crisis, during which investors lost confidence and stopped investing in the real economy, hiding their capital in quiet, safe bank deposits. Almost zero inflation generally developed into deflation, which by that time had reached, in particular, in Sweden a level of minus 0.9%. In response, the economy stopped growing: in addition to GDP, wages, the number of jobs, and demand for goods and services stopped growing. Demand for loans also fell, as potential borrowers were afraid that the crisis would prevent them from paying off their debts in the future. Banks accumulated unclaimed liquidity, which almost stopped working and making a profit.
Measures were required to stimulate economic growth. To restart the economy, theorists have calculated an effective rate of target inflation close to 2% per annum (as strange as this may sound to a Russian who is shocked by the mere fact that inflation in some countries is deliberately raised from negative values). At the same time, the national currency must be protected from sharp exchange rate fluctuations, which is not easy. Economists believe that the introduction of negative interest rates will encourage citizens and corporations to take out loans, forgetting fears of loss of solvency. A negative deposit rate may force people to withdraw capital from risk-free bank deposits to invest in real business, for example, in real estate construction. Thus, the long-awaited growth of added value should begin, which will also bring profit to investors.
What is good for the borrower?– then it’s bad for the investor
It is clear that not every Western bank has yet boldly transferred the policy of negative rates to relationships with its ordinary clients, as the state regulator does with supervised credit institutions. Not every private bank is willing to pay borrowers or charge its depositors. But let's see how this happens in life using only a few known examples.
Almost four years ago, the Danish Central Bank introduced a negative base rate (analogous to our key rate), which today has changed to minus 0.65% (with inflation in 2014-2015 plus 0.6%). One ordinary Danish mortgage holder, who took out a home loan more than 10 years ago, was very surprised when at the end of last year the bank paid him a small bonus, instead of once again calculate credit interest. At the same time, the floating annual rate of his bank’s mortgage program was approximately +0.56% per annum at that moment. However, according to the mortgage agreement, the client must regularly pay additional commission fees to the bank.
The name of the European bank that was the first to charge its depositors interest for storing money has not been established. Journalists suggest that it was one of the Swiss credit organizations. They say that a negative deposit rate is charged there for amounts over 10 million Swiss francs. According to other sources, the minimum threshold is only 100 thousand CHF, but already in several banks. The introduction of negative interest rates for deposit transactions is currently being discussed in many European countries, incl. in Spain, far from total prosperity.
Side effects
It seems that paid deposits are still a headache for wealthy VIP clients. It's them large sums it is difficult to completely convert it into a cache by hiding everything, for example, in a safe. Cashing out costs may be more expensive than negative percentage. The average population may not be affected by this rate. Citizens of economically developed countries have long been accustomed to almost zero rates. Their deposits often increase by only tenths of a percent, approximately equal to our demand deposit rates.
It is also not yet clear how long the era of negative rates will last, how effective it is and whether it is applicable to different economies. After all, along the way, problems have worsened that are not always resolved quickly and successfully. For example, almost zero interest rates could lead to another real estate credit bubble. However, there is reason to believe that Western central banks will find a reasonable solution and will be able to turn monetary policy in the right direction in a timely manner.
Are negative rates possible in Russia?
Russian investors may not be afraid of “paid” deposits for a long time. The high level of inflation, and numerous other risks of the domestic economy, do not yet provide grounds for introducing nominally negative rates. In addition, one of the conditions for the emergence of “good” deflation is a reduction in production costs (for example, due to the introduction of IT technologies), and not a fall in the effective demand of the population.
But de facto, the problems of our investors, although they lie on a slightly different plane, still make us fear the decrease in the value of savings over time. For example, there is a known imbalance between the deposit rate and the price growth index, when inflation eats up the value of invested money, sometimes more than the deposit interest covers this depreciation. And foreign currency deposits (whose low rates are already approaching European ones) do not always save from inflation and devaluation. Especially considering the sharp fluctuations in the ruble exchange rate up and down and the authorities’ intention to prevent the ruble from strengthening so as not to increase the Russian budget deficit, which is heavily dependent on hydrocarbon exports.
Experts suggest that the downward trend in deposit interest rates in Russian banks will continue this year. However, not to negative values, at least nominally. The Chairman of the Bank of Russia fears that inflation in the Russian Federation (calculated by Rosstat) will remain stuck at 6-7% per annum for a long time. The inflation target for the Central Bank is an average figure of 4% by the end of 2017. And some independent economists predict the start of growth in the domestic economy no earlier than 2020, and then only under certain conditions.
Oksana Lukyanets, expert at Vkladvbanke.ru