The bank of Japan recently made a bold move to issue negative interest rates with the hopes of using this as an additional measure to stimulate their economy. This strategy is already happening in many European banks such as Denmark, Sweden, and Switzerland.
Negative interest rates don’t apply to consumers, but rather the rates commercial banks pay central banks to hold money. If interest rates are negative, it essentially means that commercial banks will be paying a fee to have their money stored at the central banks.
The goal of this plan would be to force banks to keep less cash on hand and lend it out to consumers and businesses hopefully stimulating the economy. Many financial analysts are wondering if this will be a possibility in the U.S.
Dan Sichel, a professor at Wellesley College and former Fed economist told CNN Money the following:
“If two years ago you asked me or anybody else with connections to the Fed about the possibility of negative rates, they would have said no way, never going to happen. But given the experience of other central banks, it can be done.”
How This May Affect Investors
Although negative interest rates could cause banks to pay fees for holding money, consumers shouldn’t feel the burden. Most likely banks won’t require customers, like you, to pay fees for keeping money in their savings accounts. The reason behind this is that banks want you to deposit your money with them. Carrying the fee onto you and your deposit would go against this effort and could potentially cause cash hoarding, where you opt to store your money at home or other alternative ways.
In regards to the economy, its unclear of the impact negative interest rates could potentially have. In Japan, implementing negative interest rates has shown some preliminary signs of mortgage rates dropping and 10-year bonds having negative yields (Bloomberg), but it’s still too early to determine its long-term effect, if there is any.
For the U.S., it is yet to be determined if the Fed will implement negative interest rates. The next FOMC meeting will be in Washington in March, and we’ll keep you posted on the outcome.
Until then, learn more about how interest rates should be an economic factor to consider when you invest in real estate by reading our informative article, Interest Rates & Mortgages.