THE Reserve Bank of Australia’s (RBA) decision not to cut interest rates further this month took most analysts by surprise.
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Nearly 70 per cent of money market traders were betting on a rate cut to 2 per cent but it didn’t come. RBA chairman Glenn Stevens cited house prices as a reason not to move.
Under Stevens the RBA has been reluctant to cut rates if it is likely to fuel escalating house prices. However recent months have shown clearly that the economy needs rate cuts regardless of house prices due to the commodity price collapse and mining slump.
The RBA responded accordingly in February and analysts expected it would again in April. Traders have now increased their bets on a May rate cut. Most economists believe further cuts are needed.
Rates here may be at their lowest level since 1960 but they are still high compared to other triple-A rated countries. Switzerland, Denmark and Sweden have negative interest rates. Buy a short-term government bond there and you get back up to 2 per cent less than you invested.
Last week for the first time Switzerland issued 10 year government bonds at a negative rate, minus 0.05 per cent per annum. The issue was heavily oversubscribed. Applicants were happy to pay the Swiss government every year to look after their money for 10 years.
This extraordinary phenomenon may cause some to wonder the impossible question: if I wanted to borrow would a bank lend to me at a negative rate? Having trouble visualising that? It means the bank paying you to lend to you, or you repaying less than you borrow.
The amazing answer is, yes, it has happened. An article in the Australian Financial Review reproduced from London’s Financial Times says some consumers in Denmark have borrowed at negative rates.
It quotes an example of a woman who took a three year loan from Danske Bank at minus 0.17 per cent per annum.
Yes that’s right, the bank will pay her each month to keep the loan, rather than her paying the bank interest. She borrowed 50,000 Danish kroner so will receive about 7kr per month interest from the bank.
Even if a bank can collect money from depositors at negative interest rates why would it lend at a negative rate? Because that is better than the alternative.
The other option is for it to deposit the funds with the Danish central bank at minus 0.75 per cent per annum.
Banks in many European countries are now scrambling to check that their computer systems can cope with negative interest rates. It could be very expensive if they don’t deal with them correctly. It’s a bit like the Y2K problem of 1999.
One can imagine a long queue of borrowers at Danske Bank’s doors. Unfortunately it doesn’t lend in Australia so we can only wonder if negative interest rates will ever come here. The answer is almost certainly no. Our money supply hasn’t been pumped up like that in Europe.
We do have an oversupply of bank depositors and a shortage of people wanting to borrow, but it isn’t nearly as serious as in Scandinavia. With the RBA’s reluctance to cut rates unless absolutely necessary, negative rates aren’t on the horizon.
Yet the existence of negative rates highlights the opportunity that record low rates provide. Now is the time to borrow for any worthwhile purpose. Wealth building often requires people to do the opposite of their normal human reactions.
This is an example. With the global financial crisis and its share market crash and property price reversal still in our minds, we are reluctant to borrow.
Yet we should be borrowing, to buy businesses, farms, properties, shares, funds, almost anything other than cash.
If cash is too available and has little cost we should avoid holding it. We should use it to acquire assets in limited supply that will appreciate in value.