Retirees are advised to keep money in the bank for emergencies. But what if that account cost you money rather than earnt you money?
That’s the possibility being flagged by analysts after Reserve Bank of Australia (RBA) governor Phillip Lowe told an economic parliamentary hearing that it may need to cut the official cash rate to zero or below and employ some “unconventional” methods to get the economy back on track.
The RBA held interest rates at one per cent – its lowest level in Australian history – at its last review earlier this month, but had previously cut rates in two consecutive months.
The possibility of a negative interest rate – never before experienced in Australia – cannot be ruled out.
Negative interest rates have been implemented overseas to stimulate economies, businessinsider.com reports, and raises the possibility that banks could pay customers to borrow money for the first time in history.
Mr Lowe said: “It’s possible that we end up at the zero lower bound. I think it’s unlikely, but it is possible. We are prepared to do unconventional things if the circumstances warrant it.
“When we look overseas, we see some central banks have very low interest rates and some countries have negative interest rates. In Switzerland right now, the interest rate is -0.75 per cent, in the euro area it’s -0.40 per cent and in Japan it’s -0.10. So some central banks have gone negative. That’s one possibility.”
A Danish bank is currently offering home loans at a -0.5 per cent interest rate, meaning a customer who borrowed $1 million and paid off the mortgage in 10 years would only pay the bank back $995,000.
What could negative rates mean for you?
With positive interest rates, customers are paid interest to leave their money with a bank. The bank then lends that money at a higher interest rate to borrowers to make a profit.
“As interest rates get lower, individuals receive less interest on their deposits and pay less on what they borrow,” businessinsider.com explains. “That typically leads to greater spending as mortgages and other loans become cheaper and money sitting in the bank doesn’t earn customers much at all.
“When the interest rate enters negative territory, however, the tables get flipped completely and everything gets a little topsy-turvy.
“Negative interest rates mean that money deposited with a bank can be charged interest instead of earning it. Even more radical is the fact that banks can actually pay individuals to borrow money.”
Taking a broader view, a country’s currency is weakened by negative rates, thus boosting exports – and the economy.
But have negative interest rates worked overseas?
With the exception of Sweden, which saw a modest improvement, the other economises actually worsened, says businessinsider.com, leaving the track record of negative interest rates unproven.
“I’m not thinking that … would be appropriate in Australia,” Mr Lowe told the economic parliamentary hearing. “There are some lessons, though, that we’ve drawn.”
Assistant RBA governor Christopher Kent says he believes the need for such policies in Australia is “unlikely but certainly possible” and that the RBA could still push rates as low as 0.5 per cent by early next year.
Do you have money in the bank that you expect to be earning interest? Do you have other plans to generate an income from that money?
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