Australians could soon be paid to take out a mortgage if the coronavirus recession worsens.
The Reserve Bank of Australia has revealed that it had considered negative interest rates in an effort to face the first recession in 29 years.
Vice Governor Guy Debelle confirmed that this was one of four crisis options the central bank had investigated.
“A fourth option is negative interest,” he said.
At the very least, economists now expect the Reserve Bank to cut interest rates to a new low of 0.1 percent at its October meeting in two weeks.
Australians could soon be paid to take out a mortgage if the coronavirus recession worsens. The Reserve Bank of Australia has revealed that it had considered negative interest rates in an effort to face the first recession in 29 years. Pictured is a Melbourne Westpac sofa during Stage Four lockdown
Australia already has a mortgage interest rate of less than two percent and the Reserve Bank’s record interest rate of 0.25 percent is only a quarter of a percentage point from zero.
Australian savers receive little interest
NAB iSaver: 0.95 percent
Commonwealth Bank NetSaver: 0.9 percent
Westpac Life: 0.85 percent
ANZ Progress Saver: 0.85 percent
Negative interest rates exist in Denmark, Switzerland, Sweden and Japan.
Denmark’s central bank, known as the Danmarks Nationalbank, has an interest rate of minus 0.6 percent on deposit accounts.
Since 2019, the Danish Jyske Bank has offered home borrowers a negative annual rate of 0.5 percent for ten years.
A rival bank, Nordea, offered the minus 0.5 percent rate for 30 years.
Dr. Debelle said negative interest rates would likely weaken the Australian dollar, which is now trading at 71.60 cents, making exports cheaper.
“A lower exchange rate would certainly be beneficial for the Australian economy, so we will continue to monitor developments in the foreign exchange market closely,” he said.
Instead of paying interest, savers under a negative interest rate regime are instead taxed to keep money in the bank.
Despite this, Dr. Debelle argues that negative rates would only encourage people to save more instead of spend, which would boost the economy.
“Negative rates may also encourage more savings as households try to maintain the value of their savings, especially in an environment where they are more likely to save than spend,” he said.
Denmark’s central bank, known as the Danmarks Nationalbank, has an interest rate of minus 0.6 percent on deposit accounts. Since 2019, the Danish Jyske Bank (photo of the branch in Copenhagen) offers home loans a negative annual rate of 0.5 percent for ten years
So far, economies with negative policy rates have not cut them further.
“Instead, they relaxed monetary policy in other ways.”
Australia’s cheapest home loans
Bank of Us: 1.99 percent flat rates for two and three years (available to existing customers and Tasmanians only)
HSBC: 2.09 percent, fixed for two years
UBank: 2.14 percent for fixed one and three years
Westpac chief economist Bill Evans interpreted Dr. Debelle’s speech to mean that interest rates would be cut from an already record low of 0.25 percent to a new record low of 0.1 percent on Oct. 6.
“In a speech yesterday, the Reserve Bank’s deputy governor gave a pretty clear hint that the board plans to cut cash and other key policy rates at its October board meeting,” he said.
Australian home loan interest rates are already very low, with the Launceston-based Bank of Us offering a flat rate of 1.99 percent for two and three years – but only for Tasmanians.
HSBC has a fixed rate of 2.09 percent for two years, while UBank has a fixed interest rate of 2.14 percent for one and three years.
While borrowers get a better deal, savers are being penalized with the Commonwealth Bank, Australia’s largest bank, which cut interest rates by 0.05 percent on its Netbank Saver and Youthsaver products last week.
Commonwealth’s Netbank Saver now has a rate of just 0.9 percent.
Steve Mickenbecker, Canstar’s director of financial services, said savers were being punished.
Reserve Bank Deputy Governor Guy Debelle confirmed that negative interest rates had been taken into account. “A fourth option is negative interest,” he said
“A 0.05 percent cut on your savings account may not sound like much in itself, but stacking it on top of multiple cuts this year will all put a heavy drag on savings goals,” he said.
Savers should feel like the proverbial frog in the pan.
“Rates have fallen step by step, which means that savers are conditioned in an environment with low rates, but ultimately a blow to the return on savings.”
In October 2019, three months before the first case of COVID-19 came to Australia, reserve bank governor Philip Lowe endorsed the idea of negative interest rates.
He co-authored a paper for the Bank for International Settlements, a Switzerland-based group led by the world’s central banks, in which he suggested that the policy had worked where it was tried.
“Central banks believed that negative policy rates contributed to the achievement of their policy goals and that side effects were limited,” said Dr. Lowe.