Nery Alaev

Negative interest rates: should people fear them? 

Nery Alaev writes about negative interest rates.

This week, I’ve chosen to look into the phenomenon of negative interest rates and what the implications they have upon deposits and the wider financial environment are.

Nery Alaev

Rates in the red are commonplace in some countries

What are negative interest rates?

Negative interest rates are, in a very basic way, an effort to incentivise depositors to spend and invest their money instead of hoarding it. Policies of negative interest rates was adopted in the years after the Great Recession of 2008 by several central banks in nations such as Japan, Switzerland and Sweden

Several countries have negative interest rates, which punish savers and reward borrowers, one of which is Denmark.

In Denmark, the impact of negative interest rates are clear, as shown in a recent Bloomberg article. While individual depositors aren’t hit by ‘haircuts’, large and medium-sized businesses are and the risk has been run of them using taxes as a way to dodge any penalties.

Several other figures in the article go on to discuss the impact of negative interest rates on the country – it’s wise to keep in mind Denmark’s own economic idiosyncrasies as a nation before jumping to conclusions about the rest of Europe and the world at large, however.

Backlashes

Another article, this time from Reuters, points towards the growing backlash towards negative interest rates and their effects on nations’ economies given that the Eurozone (which has adopted the policy) has adopted the practice and still sees sluggish growth.

One economist also points out how businesses are avoiding the charges brought about by negative interest rates by passing costs onto customers, saying:

ECB policy is already counterproductive as banks are already rolling over the cost of negative rates to their retail customers, e.g. by raising transaction fees. 

Corporations are already starting to resort to hoarding cash rather than placing it with a bank at a negative rate.

This ‘hiding cash under the bed’ style approach by businesses certainly isn’t good for Europe’s economy. The article also points to near clear end for the negative interest rate policy in Europe at least.

Nery Alaev

How do the rates effect economies?

Staying on the ‘hoarding’ theme, a Business Insider article points towards a spike in safe sales, indicating a hoarding mentality is catching on in negative-interest countries.

These measures are a clear sign that individuals and businesses are wary of negative interest rates – are their fears justified? Time will tell as to whether the fairly new strategy will truly pay off.

So, should people fear negative interest rates? The answer is no, given that the policy needs time to develop. If no change in economic fortunes as a result of the rates occurs however, wariness may be justified.

Nery Alaev

Nery Alaev is the current Director of ESN Investments GmbH, which engages in acquisition and development of commercial and residential property in Germany and Austria.

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