Can negative interest rates of the central banks lead to negative interest rates in bank deposits?
The deeper prospects of having long period of negative interest rate on the Central Bank's policy rate.
Shubham Saxena
B.Tech. IIT Dhanbad
Charging negative rates on bank deposits by public is fortunately not a common practice by now. This is a feature born out of a scenario of keeping negative policy rate by the central bank and a economy characterized by low-inflation and low growth tendencies over a long period of time.
Well, it is happening in some of the banks of Europe. Generally banks bears the impact of negative interest rates, but it can sometimes be passed on to the depositors if the banks find it hard to sustain with their margins. In Denmark, negative central bank rates have started to lead to some bank customers being charged a negative rate on their accounts. In Denmark, Danske Bank is doing that for large professional depositors with large deposits.Interestingly, Danske Banks have even charged negative interest rate for some short term loans!
Could it become a widespread practice with other banks in Europe and Japan?
Well, it is happening in some of the banks of Europe. Generally banks bears the impact of negative interest rates, but it can sometimes be passed on to the depositors if the banks find it hard to sustain with their margins. In Denmark, negative central bank rates have started to lead to some bank customers being charged a negative rate on their accounts. In Denmark, Danske Bank is doing that for large professional depositors with large deposits.Interestingly, Danske Banks have even charged negative interest rate for some short term loans!
Could it become a widespread practice with other banks in Europe and Japan?
Here is a thing to understand, why most European banks won't do it soon what Nordic banks have started doing- charging depositors with negative interest rate.
Sweden and Denmark have some particular reasons other than combating deflation and stimulating demand. Nordic countries are becoming almost completely cashless economies. The Central bank of Sweden, Riksbank don't want this practice to become absolute.
Sweden and Denmark have some particular reasons other than combating deflation and stimulating demand. Nordic countries are becoming almost completely cashless economies. The Central bank of Sweden, Riksbank don't want this practice to become absolute.
Even sellers of Sweden’s version of the Big Issue magazine - Situation Stockholm - are able to accept payment via debit or credit card. Sweden is the place where, if you use too much cash, banks call the police because they think you might be a terrorist or a criminal. Swedish banks have started removing cash ATM machines from rural areas,annoying old people and farmers. Credit Suisse says the rule of thumb in Scandinavia is: "If you have to pay in cash, something is wrong."
Therefore charging negative rates would push people to pull out some money and keep it in cash form. However it is unexpected to be done largely.
Another important reason is that recent ECB actions have led the currencies of Switzerland, Sweden and Denmark to appreciate strongly against Euro which has further deepened the deflationary tendency in these countries. So their central banks are forced to further cut down the rates to a higher negative value. Recently in 2016, Sweden further lowered rates. Pressure is also building on Denmark to cut down rates further.
