Did the floodgate to negative interest rates brake? - December 18, 2019

Did the floodgate to negative interest rates brake?

Negative interest rates trickle down to retail customers, as some German banks started to impose them on individuals. Many believed that Germany was the last place pushing back against negative rates, as the country is famous for being a prudent saver.

We have already written about how low interest rates hurt the everyday people, but now the problem reached a new level. More and more banks are imposing negative interest rates on corporate clients, and some German institutes are thinking about doing the same to retail customers.

What does a negative interest rate mean?

It means that instead of growing, bank accounts can lose their value. Or to put it simply: clients lose money. Up until now bank and saving accounts had positive returns. These became smaller and smaller with time, but generally speaking people earned money with their savings. With negative interest rates now it’s possible for them to slowly lose wealth.

Why do clients have to pay?

Because more and more central banks are having super low or negative interest rates. The European Central Bank has a base rate of -0.5%, American Federal Reserve has a 1.50-1.75% rate. Base rates are influencing all the other rates in a country. Especially as commercial banks also keep some of their money at central banks, and if there’s a (close to) negative base rate, commercial banks lose money with their deposits. This is obviously an expense for them, which they have to get back somewhere. Therefore, with time, they have to impose negative rates on their clients, otherwise they make losses.

Negative rates for big clients

Negative rates were already a reality for corporate clients and high net worth individuals. According to Bloomberg, Swiss BS Group AG already charges extra for individuals over a €500 thousand deposit, and they also impose negative rates on them. The same phenomenon was seen in other banks, mostly in other Scandinavian countries.

Everyone has to pay now

The real shift here is that some German banks started to impose these rates on every client. According to another Bloomberg article Volksbank Raiffeisenbank Fürstenfeldbruck announced that it would impose negative rates on every new accounts opened at them. The interest rate will be -0.5% on new accounts. Some believe that this will open the floodgates to negative interest rates. Especially since this happens in Germany, where people are generally considered to be financial savvy and prudent savers, with an average personal saving over 10%.

The problem remains

Although commercial banks will take the blame, central bank policies are hurting everyday people too. This whole phenomenon could lead to two things. One is that people will start to spend less and less, as they get worried about losing money in banks. Less spending can hurt the economy. The other possibility is that individuals will try to earn better returns. This may boost investments, but another risk can rise from it. Some of these individuals may choose unwisely and take high risks, only thinking about profits. We’ve already seen that with the cryptocurrency boom for example.

In a market environment like this, we think it’s especially important to think twice and find professional advice when investing.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.