Negative Yields In Our Future?
Imagine a world where YOU pay banks for letting them hold your cash. While it may sound like a scam, starting in 2014, the European Central Bank started offering negative interest rates to its depositors. At the peak, $12.2 trillion of central bank deposits were paying negative interest rates.
According to Jana Randow and Yuko Takeo, economists for Bloomberg, “The idea is to jolt lending, spur inflation and reinvigorate economic growth by pushing through the floor after other options are exhausted.”
In theory, negative rates help the economy by punishing banks for holding deposits and not making loans. Borrowing costs for companies and households are lowered – which should lead to increased demand for loans.
Most banks have not passed negative interest rates on to their depositors. That would essentially be charging a fee for giving the bank the “privilege” of holding their depositors’ funds. However, some banks have experimented with passing on negative interest rates and the results are what one would have expected – depositors withdrew their funds and either stuffed it under a mattress or moved to a different bank paying 0% interest. To the shock of no one, it ends up that paying negative interest rates to your depositors is not a profitable business.
Will negative rates appear in the US? Since the pandemic reached America, the Fed cut rates to 0.25% — matching the low during the 2008 recession. However, today’s starting interest rate was much lower than 2008 – meaning the magnitude of decline, and in theory the benefit, was much lower. To match the same percentage point rate cut that helped the economy during 2008, the US might be looking at negative rates in the future.