Australia’s banks face an “existential threat” as negative interest rates become more likely – and retirees could be forced to shoulder the cost.
The Reserve Bank of Australia has cut rates three times in the past six months to a record low of 0.75 per cent, and both economists and markets predict another cut before the end of the year is almost inevitable.
It’s part of a trend that has played out globally in recent months as economies worldwide struggle with sluggish growth, making it easier for borrowers to take out loans while lowering their repayments so they have more money to spend on other goods and services.
But in Germany – a country whose economic state closely mirrors Australia’s – rates below zero are starting to sting.
In a potentially alarming development for savers, particularly those relying on their retirement savings, Germany’s second-largest co-operative bank, Berliner Volksbank, recently announced it will pass on negative rates to some of its retail customers.
The move means savers with more than €100,000 ($162,637) will see their accounts decline rather than increase over time.
Two other banks, Deutsche Bank AG and Commerzbank AG, are now reportedly considering doing the same.
Speaking to The New Daily, IBISWorld senior industry analyst Jason Aravanis said it’s “fairly likely” Australia will be forced to adopt a negative cash rate to cheapen the dollar and make the country more competitive.
“One of the best ways an economy can be stimulated to either avoid a recession or get out of one is by devaluing its currency, making its exports more competitive, and bolstering inflation a bit because buying imported goods becomes more expensive,” he said.
“But that only works if you assume other central banks in other countries aren’t doing the same thing at the same time, because if they are it just becomes a race to the bottom.”
And right now, that’s exactly what other central banks are doing, putting the pressure on retail banks.
Even if banks manage to avoid charging interest on savings accounts, savers and retirees will be the ones to lose out through reduced interest repayments intended to cover the shortfall from the banks’ lower margins.
“A bank can lend out money at negative interest rates if it wants, but what it doesn’t want to do is compensate for that by charging interest on deposits rather than paying interest,” Mr Aravanis said.
“People are very likely to just withdraw their funds entirely if the banks were to start charging them, and that’s an existential threat to the viability of the bank as a whole.
“Because if people start withdrawing money, banks runs out of cash they can lend.”
Negative account rates not so bad
University of New South Wales economics professor Richard Holden was not convinced Australia was heading toward a negative rates environment.
But even if the nation found itself in that position, Dr Holden said the real cost to savers would not be a devastating blow given the fees many account holders already pay.
“If you think about it, we already pay account fees and the cost associated with a negative interest rate is actually quite low. For sums like $100,000, its easier and safer to leave it in the bank even if it is going to cost you a little bit,” he said.
“The shock value of it is pretty bad. But if you think about it, it’s not a big problem.”
Dr Holden doubts the average account holder would try hiding their money under the mattress even if their savings were being clipped.