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How Low Can You Go: Could Australia See Negative Interest Rates?

Australia's interest rates are the lowest they have ever been, but some countries currently have a zero or even negative interest rate -- here's what happens when they go that low.

The spread of coronavirus has already had an enormous global economic impact.

In an attempt to cushion the financial blow, banks all over the world are edging towards zero interest rates. Japan, Denmark and until recently Sweden have had negative interest rates. That's right, below zero.

“Australia has never had interest rates this low. And there’s been very little experience of negative interest in any countries except for the GFC so that means the past 10 years,” Dr John Hawkins from University of Canberra's School of Politics, Economics and Society said.

How exactly does negative interest play out?

“It is quite a bizarre experience so if you put $100 in a bank and a year later instead of getting your $100 plus interest you may only get $99,” Hawkins told 10 daily.

Could negative interest rates be a reality for Australia? Image: Getty Images

In theory, less saving means more spending.

“They do this to encourage people not to save money but to actually spend it and help create jobs and productivity, but this is completely uncharted waters for us," Hawkins said.

Negative interest rates may also depreciate the currency, making our exports cheaper, lift demand for Australian goods and also make lending more attractive.

As with all economic policies there are those who benefit and those who don't.

“Losers would be savers and winners would-be borrowers. Pensioners living off interests on bank accounts are also losers as interest rates drop.”

Hawkins said the RBA has promised not to go below the current cash rate of 0.25 per cent.

But not everyone is convinced that a definitive promise can be made, given the infancy of the COVID-19 pandemic.

“Sure the RBA has said they won't go below what they currently are, it is easy to say that, but who knows what will actually happen. It could go to zero or it could go below that,” Financial services expert Steve Worthington said.

Worthington said he is concerned that, while a negative interest rate could encourage spending, in reality, it might have the opposite impact with the masses believing the economy is even worse shape than it is.

“Even in Australia as the RBA continues to lower interest rates it seems to be counter-intuitive because people think ‘blimey things are really desperate, I must keep some money handy,’” he told 10 daily.

Negative interest rates may not have the desired effect on the Australian public. Image: Getty

Hawkins said stashing money under mattresses and keeping it a lot of cash at home has been seen to happen abroad when people are nervous about the future.

And if a negative interest rate home loan sounds too good to be true, you're not off the mark.

“Home loan rates going negative is very, if not entirely, unlikely,” Worthington said.

Although in Denmark, negative mortgages are on offer. This means prospective buyers can get a 10-year home loan at a rate of minus 0.5 per cent. But the catch is the bank charges a bunch of other fees in order to make money.

In 2009, Sweden was the first country to introduce negative interest. However, a couple of months ago, the policy was abandoned with the central bank saying conditions in the Swedish economy were good and negative rates had worked well by boosting inflation and gross domestic product (GDP).

In a statement, the central bank said, “it’s a completely different question of what would happen in an economy if you had negative rates for a very long period.”

In terms of how negative interest has played out in other countries who have tried it, the results were good, but also dependent on what other factors were at play.

“It's worth noting that it is always hard to know, what the impact would have been in those countries if there weren't negative interest rates,” Hawkins said.

In a 2019 analysis of economies with negative interest, as well as other unconventional economic measures, the authors found the overall impact to be positive.

"Their use should be accompanied by measures that mitigate their potential side-effects," the authors wrote.

Both Hawkins and Worthington agreed that Australia is in need of "significant fiscal stimulus" which means the government needs to spend bucket loads, whether or not Australia gets to a point of negative interest.

Contact the author alattouf@networkten.com.au