Welcome to illuminati silver, we tell you
the truth about silver. Today is Sunday 13th March 2016 and we are
providing a brief summary as to what negative interest rates actually means.
Now before we go into the merits and demerits of negative rates, let’s just take a look
at who is adopting such a policy. Well a year and a half ago the ECB introduced negative
rates and on the 10th March this year lowered them further charging banks 0.4% to hold their
money ‘overnight’. In January the Bank of Japan adopted negative interest rates.
Sweden, Denmark, and Switzerland have deposit rates below zero too; and even the US Fed
Chair Janet Yellen has said that should there be a change in economic conditions, ‘negative
rates could be put on the table’. To show the magnitude of this policy, by February
2016, more than $7 trillion of government bonds worldwide offered yields below zero,
meaning that investors will actually get back less than that which they invested.
So what is the purpose of introducing negative rates?
Well, in theory, interest rates below zero should reduce borrowing costs for companies
and households, driving demand for loans. Also, it puts off people from saving money
and therefore, as they choose to spend it, the result is increasing economic activity,
and voila economic growth increases. In practice however, there’s a risk that
the policy might do more harm than good. If banks make more customers pay to hold their
money, cash may go under the mattress instead, removing from lenders a crucial source of
funding. So as in many cases, these negative rates have not been passed on to depositors
as the banks have chosen to absorb the cost of negative rates themselves. This squeezes
their profit margins (the difference between their lending and deposit rates), and might
make them even less willing to lend in the first place.
For some, Negative interest rates are seen as an act of desperation, a signal that traditional
policy options have proved ineffective and new limits need to be explored. Rates below
zero have never been used before in an economy as large as the Euro area. While it’s still
too early to tell if they will work, ECB President Mario Draghi said in January 2016 that there
are “no limits” on what he will do to meet his mandate and he used similar words
again recently. Interestingly, The Bank for International
Settlements warned in a March 2016 report of “great uncertainty” if rates stay negative
for a prolonged period. And if more and more Central Banks use negative rates as a stimulus
tool, there’s concern the policy might ultimately lead to a currency war of competitive devaluations.
Will this Negative Interest Rate policy work? It’s doubtful. At best it may prevent increasing
deflation; however, with average wages rising at or around 1% and those with savings worried
about the future job market we simply cannot see how this sudden ‘increase in spending’
is going to occur. It’s a worrying time for everyone and an experiment Is being carried
out which could in time have even more harmful consequences.
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of Banking, International Wealth Management and Economics. Having now retired from these
worlds we are not qualified to give investment advice. Therefore, this and other productions
must not be deemed to be giving such advice and merely represent the personal views of