What negative interest rates mean for savers and investors

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Forbes – Sarah Zevos 

Published: February 22nd, 2016

Difficulty rating

Rating: 5 out of 5.

Credibility rating

Rating: 5 out of 5.

Preview

This article talks about how negative interest rates affect savers and investors differently. It explains how central banks in some large countries have set key rates below zero and the reasoning behind their decision. The article explores the uncertainty of negative interest rates and how experts fear economic outcomes should the interest rates be implemented.

Author

Sara Zervos holds a PhD in Economics from the University of Rochester and a B.A in Economics from ASU. She previously worked as a Senior Financial Economist at the World Bank. At the time of this article Sara was a Real Estate Investor and an Investment Reporter for Forbes.

Sources

  • Bloomberg- A privately held financial, software, data, and media company.
  • Janet Yellen- Chairwoman of the Federal Reserve .

Analysis of Potential Bias

Zervos provided numerical examples to ensure total understanding of the negative rates. Opinions were provided for both sides of an argument. Zervos mentions that certain experts are scared that the negative rates will push customers out but also mentions that most analysts agree that the rates will affect the banks profits before the customers.

Article Decryption

Economists continue to debate the effectiveness and impact of negative rates. Negative interest rates and negative yields applied to banking means that, if I deposited $1,000 in a bank with an interest rate of -1% by the end of the year I would have $990. Same goes when a bond offers negative yield, the buyer does not get the full amount invested returned at maturity. 

Banks in some nine countries not including Canada have to pay central banks to hold their cash balances. Investors may be attracted to these rates for some reasons: when investors are risk averse they are willing to accept low returns instead of an actual loss. In a world with decreasing economic activity and prices, negative rates can bring positive actual returns, imagine inflation is -2% and interest rates are -1% the investor makes 1% actual return.

Some central banks have negative interest rates to encourage growth, they hope it leads to banks lending more to customers which will increase investments and expand the economy. 

However, experts are afraid that these negative rates will cause customers to pull their cash out of banks and store it themselves. Though most analysts agree that negative rates will hurt banks profit before it hurts customers.

The concept of sub zero rates may be coming to the US, the Chairwoman of the Federal Reserve that she is open to making US interest rates negative if the economy needs it.

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