Could we see negative interest rates in Australia?

Interest-RatesThe Reserve Bank will gather for its June meeting tomorrow and, as usual, there are mixed reports over whether or not the official cash rate will stay put at the current rate of just 1.75 per cent.

Tomorrow’s movements might be uncertain, but there are strong indications that interest rates will go down at some point this year, it’s just a matter of how low. Some economists are even starting to question whether we will see interest rates go into the negatives as has been done in other countries.

Five of the world’s central banks have moved into negative interest rate territory. The Bank of Japan lowered its interest rates to -0.1 per cent in February, and the European Central Bank also recently lowered their rates to -0.4 per cent. Denmark’s National Bank, the Swiss National Bank and Sweden’s Riksbank also have negative interest rates.

What are negative interest rates?

Negative interest rates are basically the reverse of what we are used to. Instead of putting money into a bank and earning interest you would be charged to store your money. You would also not be charged interest on taking out a loan.

Basically, the aim of negative interest rates is to get people saving less and spending more, which prevents people from hoarding money, which of course helps stimulate the economy.

Investopedia sums it up nicely:

“A negative interest rate means the central bank and perhaps private banks will charge negative interest: instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank. This is intended to incentivise banks to lend money more freely and businesses and individuals to invest, lend, and spend money rather than pay a fee to keep it safe.” 

Is there a chance we’ll see negative interest rates here?

When it comes to interest rates, it’s hard to predict anything for a certainty. The RBA does have some wiggle room at the moment, with seven quarter-point rate cuts still needed before we start getting into the negatives, but that doesn’t mean that it’s not possible in the distant future.

If other countries are pushing their rates down then it might force Australia to do the same eventually to help keep our dollar down and our economy competitive.

Luckily the RBA has a lot of time to observe how negative interest rates affect other countries before it even considers going down that path, but never say never.