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Negative interest rates

Written and accurate as at: Aug 15, 2019 Current Stats & Facts

According to Central Bank news, the average cash rate is 6.08%, down 0.34% for the year across the 95 monitored countries.  There is a considerable range between the lowest and highest rate.  The Swiss have the lowest at -0.75% (closely followed by the Danes at -0.65%) while Argentina the highest at 58%, followed by Turkey on 19.5%. 

The current rate of 1% has us equal 12th with New Zealand and Albania.  The Kiwis joined us like a surprise party last month while the Albanians had been on their own for the past three years before we joined their party.

Australia has experienced significant fluctuations in interest rates over the past 30 years. It is difficult to comprehend that our rate was 7.5% in 2008 let alone fathom the 17.5% experienced in 1990.  We have been on a steady decline since those heights which begs the question, why?

 

The adjustment of interest rates is a function of Monetary policy controlled by our central bank, the Reserve Bank of Australia (RBA).  

The RBA sees lowering interest rates to- 

  1. Weaken the Australian dollar; (effectively making our exports more affordable)
  2. Encourage spending (not particularly incentivised to have your money in the bank earning a measly 1%;
  3. Increasing disposable income (reducing loan repayments) 

The RBA objective being inflation kept within a band of 2% to 3%, necessary for our economy to operate in casual bliss. Well, this is all in theory, and unfortunately, the strategy has not worked to date.  Becoming increasingly concerned the RBA has signalled further cuts and potentially “unconventional things” as quoted earlier this month. 

Negative interest rates are unconventional. The concept of a bank paying you to borrow money is inconceivable. And unfortunately for us is not a characteristic of this phenomena as our banks would need to pay the RBA the equivalent rate then impose this cost onto us, their customers. 

In essence, negative rates mean savings in a bank will be charged interest rather than earn interest.  A simple solution to this could see customers withdraw their savings and sticking the cash 'under their mattress'.  No doubt people would be much happier not paying the bank interest, although it would cause significant stress on a banks ability to function.

The possibility of negative interest rates suddenly hit me a fortnight ago when the government discretely tabled a bill to enforce transactions made with physical cash amounts greater than $10,000 a criminal act citing 'to stem the black economy'. Conspiracy theorists are running rife.

 

 

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