POSSIBLE OUTCOMES OF NEGATIVE INTEREST RATES
Last year, central banks from various nations have started to implement the negative interest rates policy. Basically, this implies that instead of the usual system of depositors receiving the interest from their cash on hold in banks, they will be paying for it. The motive behind this is to urge lending and investment by imposing penalties money hoarding to tap economic progress and eliminate deflation. It typically impacts entities within the financial sector, but many are worried this prevailing trend may take a toll on the overall economy. If these rates really do persist, there are a few inadvertent consequences that might arise.
Excessive cash acquisition
Despite what was earlier mentioned about negative rates serving as a penalty for funds hoarding, the actual effect of this is actually the opposite. People are bound to amass cash with a 0% yield rather than paying fees for deposits in banks. This can have an adverse consequence on spending by initiating deflationary pressure, and can lead to conflict if clients simultaneously withdrew large amounts.
For instance, there are already hearsays that Japanese people are using safes to stash their funds. This practice can be adapted by Europe following the ECB's announcement to abandon certain bank notes. While monetary officials are justifying the move is done to prevent money laundering and terrorist funding, many experts see this as an indirect blocking of withdrawing and transferring huge sums by making the process more difficult.
Shifts in spending habits
Usually, individuals and companies purchase through credit cards and wait for an extended period of time before paying the invoices. This is the typical setup for positive yields since it give the individual a small amount due to compounding interest. However, if the rate is negative, tables are likely to be turned as people will opt for pre-paid cards instead of traditional ones. They may even draft bank checks and keep them in safety deposit boxes.
Aside from this, businesses and citizens may start paying their taxes in advance until waiting until year end. In some cases, they might overpay to divert the negative fee to the taxing authority and obtain the excess compensation in the future.
Among the common financial notions suggest that low rates and easings encourages increase in assets as people are making the most out of cheap money. However, if it becomes negative, borrowers become at risk of going into debt. Mortgage rates are often fixed to overnight lending quota such as LIBOR, which in case it becomes negative, may potentially lead mortgages to carry bad yield as well. This will damage the lenders' profitability although they can still earn by loaning from a central bank. For instance, if a bank applies for a central bank loan with a -4% on a mortgage issued at -1%, the one who borrowed will still have a credit of 1%. This trend is bound to encourage people to keep on borrowing until their arrears pile up since they are able to generate cash from doing so.
Countries such as Denmark first used the negative rates concept to block foreign investors from buying their currency, which was considered as safe back in the sovereign debt crisis period. Purchasing this "secure" denomination increase its price, which may impact exporters and hurt the economy as well. If a state authorizes expansionary monetary regulation, overseas inflows of capital will boost their denomination and undermine this policy. In response, nations may opt for a devaluation of money amid pressure to hinder interventions.
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