Are negative deposit rates possible in Russia? Negative Interest Rate Policy Negative mortgage rate.

These are strange times for European borrowers. It’s as if they live in Through the Looking Glass, where all the rules of financial existence are turned inside out. How do you like a business loan at an interest rate of minus 0.1%? Yes, yes - banks now pay their borrowers extra for taking out loans. Of course, you have to pay additional fees, and they still make the loan traditionally paid. But the bank's remuneration now amounts to no more than a percent or two. The weirdness doesn't end there.

Investors provided Germany with about $4 billion of their funds. They provided it this week, knowing that not all the money would be returned - the same negative interest rates still rule the roost. And not only government bonds, but also the securities of individual corporations, the Swiss Nestlé, for example, became unprofitable for investors.

On the other side of zero

Of course, consumer and mortgage loans with negative rates are still a rare phenomenon, although some people are really lucky. While most banks are still considering their actions in the current circumstances, some lenders have taken the actions of their central banks as a direct call. But depositors were much less fortunate - the negative rate turned out to be unprofitable for them, and now they have to pay the banks for using their deposits.

Negative interest rates in politics

Switzerland unpegged its franc from the euro, which sent markets into shock, while simultaneously cutting its key rate to negative. The Central Bank of Denmark reduced the rate as many as 4 times and in just a month. Now in this country the main rate is -0.75%. Sweden followed suit. And what’s going on in European securities markets is a topic worthy of economic research.

Back to consumers

Of course, all these incidents have not yet become widespread, and therefore depositors can still transfer their money to other banks. And bonds of emerging markets can still be an excellent alternative to European bonds.

In Russia, a fall in interest rates on loans is not yet expected. Therefore, businessmen also have to include the costs of servicing bank loans as other expenses. However, despite the rise in prices, business loans have not become more accessible - banks are still very demanding of entrepreneurs. But still

The head of the world's largest investment firm, BlackRock, called for attention to the dangers of cutting interest rates, which often turn negative, a policy that some central banks have resorted to to support the economic situation. Larry Fink, co-owner and chief executive officer of BlackRock, noted in his annual address to shareholders that low interest rates are also hurting savers, which in turn could mean the policy is having the opposite effect on the economy than expected.

He sees negative interest rates as "particularly worrying" and potentially counterproductive amid social and political risks. This has created the most volatile situation in the global economy in about the last 10 years, MarketWatch reports. “Their [central bankers’] actions are putting severe pressure on global savings and creating incentives for them to seek higher yields, pushing investors toward less liquid assets and higher levels of risk, with potentially dangerous financial and economic consequences,” Fink wrote to shareholders.

Savers are forced to put more money into investments to meet their retirement goals, which means they will spend less on their own consumer spending. These and a number of other factors, including geopolitical instability, are creating “a high degree of uncertainty in the global economy that is not has been observed since pre-crisis times." “Monetary policy is designed to support economic growth, but now, in fact, it causes risks of a reduction in consumer spending,” the German financier concluded.

The IMF is in favor, but...

Meanwhile, the International Monetary Fund also shared its own thoughts on negative interest rates. Its experts said that "overall, they help provide additional monetary stimulus and financial conditions that support demand and price stability." The IMF believes these rates could encourage the private sector to spend more, although it acknowledges that savers could be hit.

The IMF does acknowledge that there is a "limit to how far and how long" negative interest rates can go. Such a policy could cause “unpredictable consequences”: for example, banks will begin to lend to risky borrowers in an attempt to compensate for the decline in the number of depositors. Negative interest rates can also trigger boom-bust cycles in asset prices, the IMF notes.

Extraordinary measure

The logic behind introducing negative rates is very simple, says Robert Novak, senior analyst at MFX Broker. In conditions when the rates at which commercial banks can place money on deposit with the Central Bank are positive, and the economic prospects are uncertain, banks often prefer not to lend to households and businesses, but to earn money without risk by simply placing money with the Central Bank.

When rates become negative, it becomes unprofitable to keep money in the Central Bank: in order to earn money, banks are forced to engage in active lending - it is better to lend money even at a minimal interest rate and receive at least some income than to obviously lose when placing it on a deposit with a negative rate. Thus, by introducing negative rates, regulators are trying to force banks to lend more actively, and to issue loans at a minimum interest rate. In the future, this policy of “cheap loans” should have a stimulating effect on the economy.

Yes, says Robert Novak, Lawrence Fink's comments about the possible negative consequences of negative interest rates are correct. But these negative consequences are unlikely to materialize if the period of negative rates is short-lived. Still, the world's central banks consider this measure as extraordinary and do not intend to delay its application. So this policy is unlikely to lead to any serious problems.

The new chapter of the world economy

Zero or negative rates are the same as the new head of the world economy, says Alor Broker analyst Alexey Antonov. After the 2008 crisis, the United States and the eurozone did this in order to stimulate economic recovery, but they did not think about the consequences and the proper effectiveness. And, as we have seen from history, it was in vain - because the expected result did not happen. While the US is gradually recovering, growth in the eurozone is almost zero.

Over long periods, the model is disastrous for developed economies, and it seems, the expert says, that the American regulator understands this after all, since it is already thinking about raising the rate. Now they are faced with a serious question - to raise the rate, despite the global risks from China and cheap oil, or to balance at the current zero rates and wait for economic growth, and only then raise it.

Objectively, Antonov believes, now the Fed has no effective measures left to maintain the economic balance, and, perhaps, in the event of a crisis, the story of launching the printing press may repeat itself. That is, in other words, it is less stressful for the economy not to raise the rate, but this will only have an effect for some time, until the next time the machine is connected to the business - this will not solve the global problem. An increase in it, which after a while would somewhat sober up the economy, would solve the problem. But here again the question, says the expert, is whose interests does the government adhere to? Objectively, he now needs public peace and business support, so, probably, the saga with retention will continue.

We're not going there

As for the Russian Federation, then, of course, the introduction of negative rates by the Bank of Russia is out of the question, Robert Novak is sure. This measure is introduced by central banks only when there is a real threat of deflation that cannot be prevented by any other measures. In Russia, on the contrary, there is inflation that is almost twice the target level of 4%. In such cases, in world practice, not negative, but, on the contrary, increased rates are used. Which, in fact, is what the Bank of Russia did.

Nevertheless, according to Robert Novak, Russia can derive some benefit from the negative interest rates involved in Europe and Japan. Rates on Russian bonds (both government and corporate) look very attractive, and, as Bloomberg reported yesterday, Western hedge funds are showing increasing interest in ruble assets. So, all other things being equal, the regime of negative rates in the leading economies of the world will contribute to the influx of capital into the Russian Federation.

With regard to Russian realities, Alexey Antonov agrees, everything is somewhat different here. Our economy is heavily dependent on the raw materials sector, so any fluctuations in the oil market seriously affect the internal policy of the Central Bank. In a situation where oil sank significantly and the currency soared to unprecedented heights, the Central Bank was forced to sharply increase the rate, otherwise the economy would have collapsed. Currently, the Central Bank adheres to the policy of fighting inflation, which is why the rate has remained at the same level.

However, how long will he stick to it, the expert asks, is also a difficult question, because a high rate one way or another affects the development of such an important sector of the economy as small and medium-sized businesses. A slight reduction in it at the next meeting of the Central Bank would have a positive effect on improving the economy, but, believes Alexey Antonov, it could hit the pockets of Russians.

It should be noted, however, that maintaining the rate of the Central Bank of the Russian Federation at the current level, despite the fact that economies everywhere are stimulated to grow by low rates, even minus, is also a dangerous practice. It is obvious that there is no other recipe for growth other than cheap money in the world economy today, and our Central Bank does not have it either. That’s why they hardly talk about growth there, preferring other goals and terms. However, despite the interest in Russia on the part of Western speculators, which does not bring us much benefit, although it feeds the money market (which then turns into a withdrawal of capital), these goals are hardly the optimal strategy. We have been told for many years that low inflation will lead to economic growth and real investment, but it is obvious that its decline does not correlate with economic growth in any way, rather the opposite.

Maybe we should stop being afraid of taking money out of citizens’ pockets - which is how high inflation is usually reproached - and just put it there, making it more accessible? But this is a completely different logic. As for the phenomenon of negative interest rates, of course, it requires observation and study; there is not much material on this new practice yet.

Negative interest rates are a growing problem for the European Central Bank. Experience shows that such a monetary policy measure can be successful under some conditions and ineffective under others. The ECB has to offer one instrument to countries with different sets of determining factors.

Bankers, especially in Germany, are already complaining that negative rates are eroding their profit margins. Insurers and depositors are dissatisfied with the minimum payments for savings and savings instruments. However, in view of the ongoing stagnation in the eurozone economy, a number of experts are calling on the monetary authorities not only not to curtail their ultra-loose monetary policy, but also to lower negative rates even lower, and also to expand the list of assets to be redeemed. “Any side effects can be managed and are not significant enough to justify indecision” in monetary policy, says a report from the International Center for Monetary and Banking Studies and the Center for Economic Policy Analysis, which annually produces the so-called “Geneva reports” on the situation in the global economy ). The Financial Times writes about this.

While the debate between supporters and opponents of negative rates has become increasingly emotional, in practice their effectiveness depends on factors specific to a particular economy. Among them, the following are especially important: methods of bank funding, the ratio of private and public pensions, the stability of the national currency and the share of cash in money circulation.

Since 2012, central banks have introduced negative rates in seven regions - Denmark, the eurozone, Switzerland, Sweden, Bulgaria, Japan and most recently Hungary. In Denmark, for example, some mortgage borrowers now receive money from banks every month rather than paying them interest, while in some eurozone countries the positive impact on ordinary consumers is much less pronounced.

Negative rates have helped weaken the Swedish and Danish crowns, supporting those countries' exporters, but the same has not happened in Japan: the yen continues to attract capital from abroad because investors continue to view it as a safe haven.

In Germany, Italy, Portugal and Spain, bank funding is heavily dependent on attracting retail depositors, making it more difficult for credit institutions there to maintain profit margins. It's not easy for them to cut deposit rates too much or even charge money for holding funds. Banks are already facing an outflow of funds. In Germany, demand for safes from individuals has recently increased significantly, according to their manufacturer Burg-Waechter. It's not worth keeping money in a bank and paying for it, 82-year-old Hamburg retiree Uwe Wiese, who recently transferred 53,000 euros, partly including his corporate pension, into a safe at home told The Wall Street Journal. And the reinsurance company Munich Re previously announced that it would put more than 20 million euros and a stock of gold bars created two years ago into storage.

Scandinavian banks have a small share of deposits in funding, while banks in France and the Netherlands have a fairly wide range of funding sources.

Another problem is that near-zero rates make it difficult to accumulate the assets that should provide retirement income. This could cause people to act opposite to what the ECB expects - saving more rather than spending. That's why Bank of England Governor Mark Carney said he is "not a fan" of negative rates. In the UK, most people rely on private pensions, as in the US. Fed Chair Janet Yellen also recently made it clear that, together with her colleagues, she would prefer to observe from the sidelines the actions of the ECB and other central banks experimenting with negative rates.

And in continental Europe, where most pensions are paid through public schemes, the opposite effect from that in Britain can be expected, says Guntram Wolff, director of the Brussels-based think tank Bruegel. It is easier to pay pensions from current income with an ultra-loose monetary policy that stimulates employment and economic growth; This could ease people's concerns about future pension payments, the FT quoted him as saying.

Another important factor is the amount of cash: if there is a lot of cash in the economy, negative rates from central banks and their further reduction have limited impact. In Sweden they are effective because it is already an almost cashless economy: cash in circulation there is less than 2% of GDP. In Switzerland, this figure exceeds 10% of GDP, and it is relatively cheap to store cash, since there are large bills of 1000 francs. The authors of the Geneva report admit that abolishing cash is now practically or politically impossible. “But one day we may live in cashless economies... and central banks will be able to push negative rates as low as necessary to stimulate a recovery from recession,” they write.

Investor Garry Brown once proposed a simple investment portfolio that would protect against any ups and downs in the economy: 25% each in cash, stocks, bonds and gold, recalls Tim Price, investment director at PFP Wealth Management. For more than 40 years, such a portfolio served faithfully, helping to survive even the stagflation of the 1970s without losses. “But not even in his wildest dreams did Brown imagine what central banks would do to cash and bond holders,” rendering 50% of the portfolio useless for preserving capital and generating income, Price points out. And “neo-Keynesian economists advocate for the abolition of cash precisely for the sake of establishing negative rates,” he believes.

There is increasing talk in the media about negative interest rates. How effective can this approach be, since there is great uncertainty about the consequences for commercial banks, organizations and other economic entities and their behavior.

Many developed countries around the world are entering the realm of negative interest rates. Five central banks - the European Central Bank (ECB), the Danish National Bank, the Swiss National Bank, the Bank of Sweden and the Bank of Japan - have already introduced negative rates on commercial bank funds held in deposit accounts at the central bank. In fact, commercial banks must pay to store their funds with central banks. The main goal of these decisions is to stimulate economic growth and combat low inflation and the growing threat of deflation.

Why use negative interest rates?

In simple terms, with negative rates, a depositor, such as a commercial bank, must pay the central bank to store funds at the government-owned central bank. What is the purpose of such a policy? Once banks had to pay to hold their cash, they would be incentivized to lend any additional cash to businesses and individuals, fueling the economy. Another example would be a depositor (such as a large company) who must pay to hold funds with a commercial bank if the latter uses negative rates. In this case, one goal would be to encourage companies to use the money to invest in businesses, again to increase economic growth. That is, negative rates imply that lenders pay borrowers for the privilege of making loans. However, this would be an extreme case at the commercial bank level, since the economic logic of lending is to earn interest in exchange for taking on the borrowers' credit risks. However, borrowing is limited by the use of negative interest rates, and the goal is to promote consumption, one of the main engines of economic growth. So far, the listed goals and intentions for negative interest rates are very theoretical, and there is uncertainty about their implementation in practice.

Eurozone example

In the eurozone, the central bank's goal is to stimulate economic growth and increase inflation. The ECB must ensure price stability by keeping inflation below 2%, and at the same time as close to this figure as possible, over the medium term (currently inflation in the eurozone is slightly below zero). Like most central banks, the ECB influences inflation by setting interest rates. If a central bank wants to take action against too high a rate of inflation, it basically raises interest rates, which makes borrowing more expensive and makes saving more attractive. Conversely, if he wants to increase inflation that is too low, he lowers interest rates.

The ECB has three main interest rates at which it can operate: margin lending for providing overnight loans to banks, main refinancing operations And deposits. The prime refinancing rate or base interest rate is the rate at which banks can borrow regularly from the ECB, while the deposit interest rate is the rate that banks receive on funds deposited with the central bank.

With the eurozone economy recovering very slowly and inflation close to zero and expected to remain well below 2% for a long time, the ECB decided it needed to cut interest rates. All three rates have been falling since 2008, with the most recent cut being made in March 2016. The prime rate was cut from 0.05% to 0%, and the deposit rate went further into the negative from -0.3% to - 0.4%. The ECB confirms that this is part of a set of measures aimed at ensuring price stability over the medium term, which is a necessary condition for sustainable economic growth in the euro area.

The deposit rate, which has become even more negative, means that eurozone commercial banks that deposit money with the ECB must pay more. The question may arise – is it impossible for banks to avoid negative interest rates? For example, couldn't they just decide to hold more cash? If a bank holds more money than required for minimum reserve purposes, and if it is unwilling to lend to other commercial banks, then it has only two options: keep the money in an account with the central bank or keep it in cash (of course, the most expected option by central banks is that banks will increase lending to businesses and individuals). But storing cash is also not free - in particular, the bank needs a very secure storage facility. Thus, it is unlikely that any bank would choose such an option. The most likely outcome is that banks will either lend to other banks or pay a negative deposit rate. Between these two options, the second one seems more realistic, since at the moment most banks hold more money than they can lend, and it is not necessary to borrow from other banks.

The opposite effects of negative rates

As central banks aim to boost economic growth and inflation through negative interest rates, such policies are becoming increasingly unusual and raise questions worth considering. Below are some of the main pros and cons.

Firstly Given that central banks' intentions are being met and negative interest rates are stimulating the economy, this would be a positive sign for the banking sector. If markets believed that negative interest rates improved long-term growth prospects, this would increase expectations of higher inflation and interest rates in the future, which is beneficial for banks' net interest margins (commercial banks make money by taking on credit risks and charging higher interest on loans than they pay on deposits - in this case they have a positive net interest margin). Moreover, in a stronger economy, banks would be able to find more profitable lending opportunities, and borrowers would be more likely to be able to repay those loans. On the other hand, negative interest rates could harm the banking sector. If the lending rate is constantly kept lower due to falling interest rates, and commercial banks are unwilling or unable to set the deposit rate below zero, then the net interest margin becomes smaller and smaller.

Secondly, a negative interest rate policy should encourage commercial banks to lend more to avoid central bank charges on funds that exceed reserve requirements. However, for negative rates to encourage more lending, commercial banks would have to be willing to make more loans at lower potential income. Since negative interest rates are introduced as a counterbalance to slow economic growth and the risks of deflation, this means that businesses need to solve problems arising in this area and, as a result, banks face increased credit risks and reduced profits at the same time when lending. If profit levels suffer too much, banks may even reduce lending volumes. Moreover, the difficulty of setting negative rates for savers could mean higher debt costs for consumers.

Third, negative interest rates also have the potential to weaken a nation's currency, making exports more competitive and increasing inflation as imports become more expensive. However, negative interest rates can trigger a so-called currency war - a situation in which many countries seek to deliberately reduce the value of their local currency in order to stimulate the economy. A lower exchange rate is clearly a key channel through which monetary easing operates. But widespread currency devaluation is a zero-sum game: the global economy cannot devalue its own money. In a worst-case scenario, competitive currency devaluation could open the door to protectionist policies that would negatively impact global economic growth.

Fourth From an investors' point of view, negative interest rates could, in theory, serve the same function as cutting rates to zero - this could be beneficial for exchanges, since the relationship of interest rates to the stock market is quite indirect. Lower interest rates imply that people looking to borrow money can enjoy lower interest rates. But it also means that those who lend money or buy securities such as bonds will have less opportunity to earn interest income. If we assume that investors are thinking rationally, then falling interest rates will encourage them to take money out of the bond market and put it into the stock market.

But in practice, this particular policy of negative interest rates may not be so useful. Investors may view negative interest rate policies as a sign of attempts to sort out serious problems in the economy and remain risk averse. Also, the use of negative interest rates will not necessarily encourage commercial banks to increase lending, which will make it more difficult for financial companies to make profits in the future and harm the performance of the global financial sector. Problems in the financial sector are very sensitive for the entire stock market, and they can weaken it. And even if commercial banks wanted to increase lending, success in encouraging businesses and individuals to borrow more money and spend more is questionable.

Fifthly, negative rates could complement other easing measures (such as quantitative easing) and signal to the central bank the need to address the economic slowdown and missed inflation target. On the other hand, negative interest rates could be an indicator that central banks are reaching the limits of monetary policy.

Main conclusion

Central banks are determined to do everything possible to increase economic growth and inflation. With interest rates already at zero, an increasing number of central banks are resorting to negative interest rates to achieve their goals. However, this is a relatively new tool for them, and the main opportunities and risks of such a policy have not yet been realized. Therefore, it is worth taking a closer look at and monitoring the unintended consequences of these increasingly popular policies. Currently, the eurozone economy is gaining momentum slowly, inflation is low, commercial banks are in no hurry to increase lending volumes, but instead are looking for other ways to reduce the potential damage to profits, the desire of businesses and individuals to take out more loans at a lower interest rate is growing quite slowly, investors are not rush to take on more investment risks, bond yields remain at record lows. Negative interest rates will take longer to realize the full impact.

Gunta Simenovska,
Head of Sales Support Department, Business Development Department, SEB Bank

Sources: European Central Bank, World Bank, Bank for International Settlements, Nasdaq, Investopedia, Bloomberg, BBC, CNBC

Before you understand how negative interest rates work and why they are needed, you should understand the very understanding of what they are.

A negative interest rate is a real interest rate set by the bank in conditions of inflation and equal to the difference between the announced rate and the inflation rate that exceeds it. And in simple words, this is the percentage that the bank withdraws from clients who hold deposits for the fact that they provide the bank with the opportunity to use their personal funds.

Who would agree to this? What is it for? The answer is quite simple and prosaic. When a situation arises in a state’s economy in which the rise in inflation is so high that holding cash threatens to lose most of the money, people begin to look for the least risks for themselves and their finances. Such situations have already been observed in regions where weak economic growth prevails, for example, in the countries of the European Union. Thus, when looking for security for their savings, people come to the conclusion that they either need to agree to the bank's terms, paying a negative interest rate on their deposits, but at the same time keeping their savings in a larger volume than if they kept them in cash. Or switch to alternative money substitutes, such as gold, silver, diamonds, real estate and antiques, futures, stocks and bonds.

At the same time, it is beneficial for the banking system of any country that people do not save their funds and accumulate them, but constantly spend them, which will lead to an increase in the issuance of loans, and therefore the profitability of banks. A similar situation can be observed in the United States, when a prolonged decline in the economy leads to citizens taking out less and less loans and increasingly trying to save money in order to have a reserve of personal funds in case of unforeseen situations or “hard times”. Having low profitability compared to previous periods, banks are losing a lot and are trying in every possible way to encourage people to use the credit system. It is clear that when the banking system collapses or decreases in profitability, the economy of the entire country also suffers, since the banking sector is one of the most profitable sectors of the state. This is why introducing a negative rate is very beneficial for banks.

Let's look at an example: if a bank accepts deposits at -6% per annum, but issues loans at -2%, then in any case it always remains in the black by 4%, which will naturally go into the pockets of bankers and the state. Thus, we see that regardless of whether the rates are positive or negative, the bank always remains in the black.

But how to get people to agree to such conditions? After all, no one wants to lose their money even in small quantities, much less pay the bank for storing your savings. It would be much easier to keep this money at home without any interest rates and headaches.

The answer is outrageously simple. We need to make sure that the population has no other choice, and they voluntarily go to banks to give their money. This can be achieved by artificially creating an increase in inflation by raising prices and devaluing paper currency. Another lever of such management is the depreciation of the currency compared to the main units - the euro and the dollar. Then, seeing that their personal savings are depreciating very quickly, people are forced to either invest them in something that has a permanent value, for example: real estate, precious metals, securities and the like. Or humbly go to the bank and give them your money for safekeeping, paying a negative interest rate for this.

The practice of introducing negative interest rates is already widely used in European countries. For example, in Denmark in 2012, the interest rate dropped below zero to the level of -0.75%, maintaining this trend; in October 2015, its level dropped to -0.9%. And according to the forecasts of economists and financiers, this trend will continue until 2017. Switzerland followed the same example, maintaining the level of its negative rates at -0.75%. Sweden settled at -0.35%. The purpose of such policies in Denmark and Switzerland was to reduce the incentive for foreign clients to keep money in their bank accounts. A high level of foreign capital inflows began to stimulate the national currency, and its exchange rate increased strongly against the euro. Sweden is pursuing one single goal - inflationary pressure on the population.

Based on the results of this policy, it can be called successful: Denmark was able to keep the national currency from falling further against the euro. Switzerland was also able to stop this process and today the franc is successfully trading within the usual and acceptable range of exchange rates. Sweden has not yet achieved great results, and the inflation situation remains quite unstable, but financiers predict a successful outcome of this monetary policy.