“Negative interest rate” is among the terms in finance and economic news that can be confusing. Viewed in terms of a bank loan, why would a bank agree to be paid back less then they lend? On the individual, consumer level, this is very rare, if not inconceivable. However, it is a tool used by governments in their monetary policies.
“Negative interest rates do exist,” explains Richard Cayne of Meyer International. “But only in the realm of central banks and institutional finance. Nevertheless, it does impact the individual investor.”
Are negative interest rates like they sound?
Yes, negative interest rates are what they sound like. They are the reverse of interest, where you would pay interest on a savings account and accrue interest on a loan. It gets more complicated, but we will keep the discussion simple here. Negative interest rates are usually implemented by central banks to encourage commercial banks to spend and lend. If they chose to hoard their reserves at the central banks, they would be charged interest and lose money.
To encourage businesses and individuals to borrow, commercial institutions will keep their interest rates low. So, if all goes well, money continues flowing, and the economy gets healthier. Currently, Japan, Denmark, Sweden, Switzerland, and the Eurozone all have negative interest rates in their monetary policies with different degrees of success.
Why then should negative interest rates matter to me?
Being able to borrow money at low interest rates is a great opportunity for individuals and businesses who plan on a large purchase or investment (preferably with returns better than the loan interest!). But even if you don’t live in a country with this policy, you may still feel an effect. In this global community the money that is flowing doesn’t necessarily stay in that country. Companies may take that borrowed capital and invest in other countries. Or they may increase production or improve operations, making them more attractive to outside investors. On the negative side, negative interest rates do affect government bond returns. Often yields will drop. And since some corporate bonds are linked to government debt, the private sector may take a hit in some respects.
As things stands, negative interest rates are part of the global economy, but not a fundamental factor. Nevertheless, you should be aware of what they are, especially if you have an international facet to your portfolio, which most people do nowadays. If you would like to learn more about negative interest rates and whether you should adjust your portfolio, contact a trusted financial expert, such as Richard Cayne, who can go over your investments and discuss your options with you.