Chuck Bentley on What You Need to Know About Negative Interest Rates

Dear Chuck,

I can’t wrap my head around negative interest rates. What does this mean for my savings accounts in the bank? Can you help me figure this out?

Confused about Rates

Dear Confused,

You are not the only one who finds this a challenge to understand. Simply put, it inverts the model that we have known and practiced for years: putting savings (money) in the bank to earn interest not to pay interest!

Some History and Bigger Picture

Negative interest rates have historically been used to combat deflation. Finance writer Justin Kuepper explains,

“…deflation causes people and businesses to hoard cash rather than spending and investing it, which reduces demand for products and services and puts downward pressure on prices. Lower prices can lead to reduced profits and less economic growth, which in turn leads consumers to hoard even more cash.”

The European Central Bank introduced a negative interest rate policy in 2014. The Bank of Japan did it in 2016. Bloomberg reports that negative rates have been available on short-term mortgage bonds in Denmark since May, but only recently made directly available to consumers.

Now, Denmark’s third largest bank is offering a 10-year fixed-rate mortgage at an interest rate of negative 0.5%. Other lenders there are offering 0% on a 20-year fixed-rate and 0.5% on 30-year fixed-rate mortgages.

Why is this seemingly upside down practice gaining ground and may be coming to the US? Nervousness about the economy. There’s uncertainty in the US-China trade war, Brexit and a generalized economic slowdown.

Lise Nytoft Bergmann, the chief analyst at Nordea’s home finance unit in Denmark, reflects:

It’s an uncomfortable thought that there are investors who are willing to lend money for 30 years and get just 0.5% in return. It shows how scared investors are of the current situation in the financial markets, and that they expect it to take a very long time before things improve. 

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SOURCE: Christian Post, Chuck Bentley