Countries around the world have begun to lower interest rates to negative levels, in an effort to spur growth. Theoretically, this means that banks will be hesitant to hold cash reserves with their central bank (because they would be PAYING interest instead of earning interest), and will instead make loans to businesses and consumers. These loans would help encourage investment, and eventually act as a stimulus to the economy. Additionally, negative interest rates tend to drive down the value of a country’s currency, making its exports cheaper and more competitive in global markets.
In reality, some banks have passed these negative rates onto consumers. For instance, if you have a savings account with a bank, you are used to earning a small amount of interest on the cash that lies in the account. In the current situation, you would be paying a small amount of interest just to hold your cash in the account. Naturally, people are withdrawing their cash and keeping it at home instead of the bank. Why pay the bank interest when you can just put the cash in your mattress at no cost?
Japan is one of the countries that has recently dipped into negative interest rate territory. They have experienced anemic GDP growth for a long time, and this is an attempt at using monetary policy to improve results.
Which investments have been successful in this environment?
Below-zero rates in European and Japanese bond markets have created greater demand for American bonds, raising their prices and driving down yields. So if you’re holding American bonds, you’re likely to have benefited so far from these negative rates abroad. Conversely, if you’re considering investing in American bonds, you should take note of the lower yields being offered at the moment. Are you willing to lock up your money in a 10-year treasury note for just a 1.9% yield? Maybe you are, considering even lower rates in Europe and Japan.
One of the more obvious successful investments so far have been safe-makers. Yes, those big metal boxes that lock up your valuables. Japanese firm Shimachu Co., which operates a chain of stores selling hardware and home products, said that sales of safes in the previous week were 2½ times higher than in the same period a year earlier (WSJ article).
Negative interest rates are a strange phenomenon, but it’s very important to understand how they can affect your investments, cash deposits, and even potential mortgages. I think this type of monetary policy will be here to stay for a while. If the currencies of these countries depreciate further, the United States may have incentive to lower interest rates just to keep our exports competitive.