Central Banks are Embracing Negative Interest Rates, but Your Savings are Secure for Now

Negative interest rate in practice is designed to jumpstart growth in the economy by pushing people away from hoarding money. When the economy is suffering from deflationary headwinds, people and businesses tend to go on the defensive by hoarding their money in bank accounts to keep it safe instead of using the money for active investing.

The introduction of negative interest rates will have central banks (private banks are not exempted) charging negative interest rates. Negative interest rates means that you’ll have to pay the bank to keep your money safe instead of expecting an interest (or toasters) at the end of the year.

Negative Interest rates becomes the new normal

The recent wave of negative interest rates started in the ECB in June 2014, Denmark and Switzerland made the switch in September, and Sweden joined earlier this year. Negative interest rates is an unconventional (read weird) monetary policy tool that sets interest rates in negative territory below the nominal value of zero percent. Sweden has set her rates at -0.35% and Switzerland has its rate at -0.75%. Denmark’s interest rates stand at -0.75% and ECB has it rates at -0.2%.

Sweden and Switzerland have proved that negative interest rates won’t force people to withdraw their money from banks and stuff them in mattresses. Now, it seems many central banks are eager to adopt the negative rates. Alan Ruskin, global head of Group-of-10 currency strategy at Deutsche Bank AG in New York notes “There’s a very real chance unorthodoxy becomes the new orthodoxy.”

Negative interest rates were supposed to be the solution when the economy is in a tight spot; however, the negative rates have become the new normal in the light of today’s tough economic clime. Central Banks globally are now embracing negative interest rates – a move that would have sounded downright crazy some twenty years ago. The question of whether the U.S. Federal Reserve will raise interest rates this year has been a major issue on Wall Street as the market expects a December rate hike.

The U.S. Federal Reserve has also hinted that negative interests were not off the table if the U.S. economy fails to gain decent traction in the short to medium terms. In the words of Fed Chair, Janet Yellen, “if circumstances were to change” then “potentially anything, including negative interest rates, would be on the table.”

Printing of money by Central banks defeats the purpose of negative rates

In the 1970s, Switzerland introduced negative interest rates to halt the flood of foreign investment that threatened the sanity of its economy. Global investors were flooding Switzerland with money in a bid to escape inflationary trends in Europe and the volatile situation of the Middle East. Switzerland is back to using negative interest rates; yet, it is doubtful that negative interest rates will solve the problem for many of the countries adopting it in today’s global economy. The main reason negative interest rates might not trigger an economic recovery especially in the United States is the indiscriminate printing of money by central banks.

The U.S. sits on a huge pile of debt, in September 2014, the total U.S. debt was $17.8 trillion. Foreigners such as China, Japan, and Belgium held $6.06 trillion of the debt; yet, the Fed is not solving the debt issue but it is still printing money to raise funds out of the air.

Ben Bernanke, erstwhile Fed Chair said it in clear words in an infomercial on “60 Minutes” that the Fed is “effectively” printing money. He said, “Well, effectively. And we need to do that, because our economy is very weak and inflation is very low. when the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation.”

European central banks are also starting new waves of quantitative easing to pump money into their economy. Today, ECB head, Mario Draghi hinted that his bank is willing to add more monetary stimulus to the economy as part of plans to push inflation higher. While speaking to members of the European Parliament in Brussels, he noted that signs of a turnaround in low inflation “have somewhat weakened.” The ECB is set to buy 1.1trillion euros ($1.2 trillion) bonds with newly printed money in the next one year.

Negative rates won’t affect your savings, yet

One of the fears about negative interest rates is that they might cause people to withdraw their cash from banks and stuff them in mattresses or bury them in their backyard. Savers are already losing money with inflation but a negative interest rate will show them real proof of reduction in their savings

However, it doesn’t appear that negative interest rates would affect everyday people – at least not yet. The negative interest rates that central banks are setting are still very low; they won’t be passed down to depositors yet. More so, commercial banks won’t want to lose their customers to rivals (or mattresses) by offering negative rates.