Expert on negative interest rates: We'll save more, work longer, get less

Lauren Abdel-Razzaq
The Detroit News

Frankfurt, Germany — Imagine a mortgage that pays you the interest, not the other way around. Or a savings account where it’s the bank, not the saver, who collects interest.

Welcome to the upside-down world of ultra-low and negative interest rates that is taking hold in many parts of the world where economic growth has been sluggish. Now more than a decade old, economists think it could be a feature of the global economy for years to come and change the way people save and invest.

In this July 10, 2019, file photo a woman looks at an electronic stock board showing Japan's Nikkei 225 index at a securities firm in Tokyo.

“This will mean that we must save more, work longer, and expect less,” said Olivia Mitchell, an economics professor at the Wharton Business School at the University of Pennsylvania.

The latest chapter is the drop in interest rates on some bank deposits below zero as central banks, particularly in Europe and Japan, try to support the economy amid uncertainty about trade by making borrowing cheaper to spur spending and investment. Official data released Friday showed that Germany’s growth ground to a halt at the end of last year.

Economists think there are also longer-term factors causing low rates, such as aging populations in rich countries and high rates of savings in China and other emerging economies. 

Low rates first hit in the wake of the global financial crisis. The U.S. Federal Reserve, Bank of England, Bank of Japan, and European Central Bank slashed rates close to zero. In 2014, the ECB went negative. 

Ultra-low rates have helped push up stock markets to record highs, as vanishing returns on safe assets lead to a search for returns elsewhere. Pushing people to invest in riskier assets is part of the stimulus effect central banks are trying to impart. 

But there are also fears that very low rates can cause markets to bubble up, and crash back down with painful consequences. The dire predictions have yet to come true. The current bull market in U.S. stocks turns 11 years old on March 9.

In Germany, some banks are now telling companies and others with large amounts of cash that they must pay a rate on large deposits instead of accruing interest.

Banks are doing this because they themselves have to pay a 0.5% penalty on deposits they hold at the European Central Bank. If banks can’t find a home for depositor money, it winds up in their ECB holdings and results in their being charged.

This June 22, 2019, file photo shows the European Central Bank during sunset in Frankfurt, Germany.

Small depositors like individual consumers are not being charged on savings. The idea is politically toxic, especially in Germany.

But the low rate environment raises questions about preserving wealth, especially for those trying to save for retirement.

On the positive side of the ledger, low or negative interest rates can make it easier for companies and consumers to borrow, stimulating economic activity. The European Central Bank says its policies created 11 million new jobs since 2013. In the U.S., home sales have picked up as mortgage rates have fallen to 3.7%.

Denmark’s Jyske Bank offers a minus 0.5% interest mortgage while still making a profit. Customers must make monthly principal payments, but the sum they owe is whittled down month by month by the negative rate over the life of the mortgage. The bank is able to fund the mortgage by selling a bond at minus 0.5%, passing the rate to the customer, and making money on modest mortgage fees.

It’s worth noting that real interest rates — in other words, when official and market rates are below the rate of inflation — have been negative at several points in history, such as in the 1970s, when inflation in the developed world ran into double digits.

What’s unusual today is that the actual quoted rates are below zero and that rates have been low for so long.

Federal Reserve officials have downplayed the potential for negative rates in the U.S.

“That’s not a tool we’re looking at,” Federal Reserve Chair Jerome Powell said Tuesday during a congressional hearing.