The effects of the negative interest rates – Should we stick to banks? - March 20, 2016

The effects of the negative interest rates – Should we stick to banks?

Major central banks around the world are trying to revive their economy with a risky technique, and they may hit a dead-end with it. More and more federal banks use negative interest rates, which was almost unimaginable before. Not so long ago, Bank of Japan joined the club formed by the central banks of the EU, Denmark, Switzerland and Sweden.

From all these measures we can see the fear of deflation, but that is a problem over us. Of course, there is another reason for using negative interest rates: central banks are trying to devalue their own currency so they can make the export more competitive. There’s only one problem with this idea: everyone is trying to do it, so it’s not too effective.

The other explanation behind the negative interest rates is that this might help pulling the economy out of recession, while motivating banks to loan. To be honest, banks would lend money but there’s simply not enough demand for it at the moment.

These events hurt the EU member countries’ yields as well. A total of more than 2 trillion euros worth are now below zero. A buyer of these bonds at par who holds them to maturity is guaranteed to lose money.

The capital is looking for returns

This fiscal policy has led investors to put their money in stocks, bonds, maybe real estate. Of course, because of this, these instruments became more and more expensive. Up until now mostly the bigger market players used this technique, while people with smaller savings kept their money in banks.

But from now on, this solution is getting worse. Central banks’ negative interest rates effect the rates of retail banks too. Rates started to fall, which means that if we keep our money simply in the bank, our balance may not grow with time.

Generally speaking, interest rates between 1-2% would be a lot healthier, but we will have to wait for that. Even if that rate wouldn’t hurt the economy, banks would work better too.

What should we do?

These low or even negative interest rates are unfavourable for common people's wealth and also, change the way of general investing methods. So if don’t try to invest our savings in different methods than a bank account, we can even lose it slowly.

In an environment like this, it is a good idea to look for instruments which have good value now, or maybe lost a part of their value in the last years, but have a positive outlook for the future. This might be oil which already started to rise, and may even stimulate other markets as well. Gold also stopped its 5-year long fall and started to hike. And as always, there are great opportunities in stocks, even at European banks.

Altogether, the best solution is still investing money in a well diversified, professionally assembled portfolio. This way we can not only realise decent returns, but can also reach safety for our investments. This is almost always a better idea than to keep our money in a bank that has negative interest rate.

Disclaimer: Innovative Securities’ Profit Max has a highly diversified portfolio, containing more than 120 instruments in more than 20 markets. Investing in this portfolio can lower the risks, while still grant great returns to our partners.