Updated: Oct 23, 2020
Understanding Negative Interest rates in Australia.
The question on so many peoples minds right now is nothing new. In fact, negative interest rates are already being experienced in Switzerland, Denmark and Japan. As part of the governments weapons to stimulate the economy in the midst of COVID-19, negative interest rates would make borrowing money much cheaper whilst have the adverse effect of saving money more expensive.
Understanding the mechanics of negative gearing.
Negative interest rates essentially means the bank would pay you for any loans you take out, while charging a fee for any savings you have in the bank. In theory, banks would rather lend money to borrowers and earn at least some interest as opposed to being charged to hold their money.
What that means when it comes to home loans is, you’d end up paying back less than you borrowed.
In its quarterly statement on monetary policy the central bank says negative interest rates would be an “extraordinary unlikely” course of action, even when it believes the unemployment rate is heading to 10 per cent.
The Reserve Bank concedes negative interest rates would be a stimulatory benefit by putting downward pressure on the Australian dollar.
The cash rate was cut to a record-low 0.25 per cent in March and has remained there since.
The Reserve Bank board insists it will not increase the cash rate until progress is being made towards full employment and it is confident that inflation will be sustainably within the two per cent to three per cent target band.
The main stay objective of negative interest rates in a struggling economy is to encourage people to buy homes, spend using their credit cards, and take out other types of loans.
IMPORTANT KEY TAKEAWAYS
Negative interest rates are an unconventional, and seemingly counterintuitive, monetary policy tool.
Central banks impose the drastic measure of negative interest rates when they fear their national economies are slipping into a deflationary spiral, in which there is no spending—and hence, dropping prices, no profits, and no growth.
With negative interest rates, cash deposited at a bank yields a storage charge, rather than the opportunity to earn interest income; the idea is to incentivize loaning and spending, rather than saving and hoarding.
In recent years, several European and Asian central banks have imposed negative interest rates on commercial banks.