Negative interest rates are spreading - February 05, 2020

Negative interest rates are spreading

Negative or close to zero interest rates are spreading across the developed world. Now 38 German banks impose it on clients while some financial institutions started to use such a rate in the Netherlands too. We don’t expect this trend to turn over.

More banks are imposing negative interest rates on their clients across the developed world every day. At the moment, corporate and rich clients are in the worst situation, but the less wealthy consumers started to be affected just as well.

German banks have “fallen”

Last year we wrote about how German banks started to impose negative interest rates on their clients (see: Did the floodgate to negative interest rates brake?), making them lose money. Since then, it seems that things got worse.

According to Verivox, at least 16 new institutions introduced negative interest rates. Now “38 institutions are currently charging negative interest from private customers”. What’s more, seven others charge some fees over deposits, and due to generally low rates this “would actually result in negative interest, even if it is not shown as such”. Most of these measures only affect the rich private customers, but two banks impose these “penalties” to accounts with under €100,000 too.

This year a second Dutch bank, the well-known ING also imposed negative rates on their clients too. Truth be told, these only for clients with a more than €1 million amount in their account. The other Dutch bank, ABN Amro only imposes negative rates for clients who have above €2.5 million. The trend however is clear.

It costs a lot to banks too

These close to zero rates are bad for the banks as well. A new research came to the conclusion that “Swiss banks have been forced to fork out CHF8 billion ($8.3 billion) in negative interest fees” to the Swiss National Bank due to the central banks’ base interest rates.

Close to zero and negative interest rates hurt banks all around the developed world, especially the US and the EU. Without imposing these on their clients, they could easily lose money, which could have serious repercussions. Mostly, it would badly hurt lending which is an important engine for the economy.

The clients pay the price in the end

At the end however, small clients and private consumers pay the price. They are the ones who will see their money slowly disappearing from their savings accounts. (See: How do low rates hurt everyday people?) What’s more, we don’t expect the trend to turn around, and we’re not alone. Hans Michelbach of the German CSU party said that "the spiral will continue to turn” and bank customers will have to face even more penalty interest rates. (Although, there are some voices inside the European Central Bank that support higher rates. USA’s Donald Trump on the other hand constantly pressures the FED to keep rates low.)

In a market environment like this, it will be especially important to think about investments rationally and on the long-term. Great risk assessment, diversification, and actively managed portfolios may show a way out, while turning to riskier investments (like FX trading) can cause even more problems.

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.