New warnings on negative interest rates

The Reserve Bank has maintained that negative interest rates are unlikely, but the prudential regulator has warned banks to prepare for the event.

In a consultation with authorized deposit-taking institutions (ADIs, i.e. banks), the director of the banking division of the Australian Prudential Regulation Authority (APRA), Therese McCarthy Hockey, told the banks to prepare if the “unlikely” event occurs.

“APRA expects ADIs to at a minimum develop tactical solutions to implement zero and negative market interest rates and a cash rate by April 30, 2022,” Ms. McCarthy said. Hockey.

The Reserve Bank of Australia has argued that a negative cash rate is highly unlikely in Australia.

“However, this does not exclude the possibility of a negative cash rate in the future. Regardless of the level of the cash rate, it is possible that other interest rates determined in the financial markets may fall. to zero or below zero at any time, Ms. McCarthy Hockey said.

Officially, the Reserve Bank’s spot rate target was kept at 0.10% earlier this month, but additional factors like the RBA’s bond-buying program pushed the interbank rate. day to day near zero.

Ms. McCarthy Hockey highlighted some of the “significant risks” for banks with negative interest rates.

“APRA considers the risks arising from not preparing an ADI at zero and negative interest rates to be significant, as it could have significant implications for risk management, hedging, business processes, contracts, product information, IT and accounting systems of an ADI, among other areas. ,” she said.

“Insufficient preparation for the possibility of zero and negative interest rates could therefore have a negative impact on an ADI, its customers and the markets in which it operates.”

What would a negative interest rate look like for consumers?

The Swedish central bank “Riksbank” was the first to use negative rates in July 2009, bringing them down to -0.25%.

This is 35 basis points lower than the current RBA rate.

Since then, a number of European countries, as well as Japan, have flirted with negative interest rates from time to time.

However, a negative interest rate does not necessarily mean that the banks are paying you to take out a home loan, even if they would close.

In practice, this can be seen in Denmark, where “Nordea Bank Abp” offered a fixed 20-year zero-interest mortgage in January.

‘Jyske Bank’ also offered a 10-year fixed mortgage at -0.50% in 2019.

This effectively means that the money owed each month decreases more than the repayment.

Denmark’s central bank’s cash rate is now 0.00%, but in March 2020 it was as low as -0.60%.

It is also likely that with a sufficiently high negative rate, there would be charges on bank deposits.

Photo of Ussama Azam on Unsplash

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