Catalyst News

Negative Interest Rates – What Do They Mean?

by Catalyst Corporate | Oct 01, 2019

Negative interest rates. You read that right. And yes, they do exist within the context of today’s global market.

“While not expected, it’s important that credit unions consider the possibility of negative interest rates, understand the implications they can have, and start thinking about what they may need to do in terms of strategy,” says Mark DeBree, Catalyst Strategic Solutions Managing Principal.

On opening day of Catalyst Corporate’s 42nd annual Economic & Payments Forum, DeBree discussed the potential impact of negative interest rates with an audience of 200+ credit union professionals. Every year Catalyst Corporate brings together economists, payments trend experts and credit union thought-leaders for 3-1/2 days of informative speaker sessions and innovative strategy discussion.

The theme of this year’s Forum – The Future is Coming – and the topic of negative interest rates coincide, as both point credit unions to preparing for what lies ahead. To equip for the future, DeBree noted the rise in negative interest rates globally and suggested that credit unions start thinking about them from a risk management standpoint.

So, what are negative interest rates? They refer to a scenario in which cash deposits sustain a charge for storage at a financial institution, rather than receiving interest income. Basically, instead of receiving money on deposits in the form of interest, depositors must pay to keep their money with the institution.

“Negative interest rates are backwards,” explains DeBree. “There’s the traditional view in which savers are compensated when choosing to lend money. They are paid to forgo consumption now, in lieu of consuming in the future,” he said. “Negative interest rates, on the other hand, flip the time value of money concept. All of a sudden, savers are penalized for postponing consumption by saving money.”

With negative interest rates, relationships reverse, DeBree says. The benefit of a financial transaction is redistributed from net savers to net borrowers. In other words, “borrowers benefit at the expense of savers. At some point, if rates move negative, people may choose to hold onto their cash rather than deposit it,” he said.

According to DeBree, potential causes of negative interest rates include:

  • Aging population
  • Desire for younger generations to retire sooner
  • Slowdown in technological progress
  • Persistently low inflation due to globalization
  • Fear

“All these factors play a role, as each depresses growth or inflation,” he adds.

After seeing negative interest rates in other parts of the world, the next, “big” question is: Are negative interest rates coming to the U.S.? Despite signals from the inverted yield curve, a recession is not expected, says DeBree. Here’s why:

  • The overall economic outlook remains positive
  • The economy is weakening, but still growing
  • Although below target, inflation remains in a reasonable range
  • U.S. employment is strong

Negative interest rates carry many unknowns. Their impact is just starting to be felt. The best way to be prepared? DeBree offers this advice, “Learn from the experiences of other countries and use that knowledge to plan ahead. Hope is not a strategy, you need a plan.” 

DeBree closed with these key takeaways:

Negative interest rates are not likely or expected. However, credit unions should consider the possibility from a risk management standpoint. He suggests creating a rough plan to be better prepared for future interest rates.

“Ultimately, it comes down to what we can do versus what we want do,” says DeBree.