What Do Negative Rates Mean?

In a deflationary economy interest rates turn negative. What do negative rates mean for Forex, investors and savers? Bloomberg Business reports that on a macro scale central bank reserve managers with $6 trillion in assets are getting away from currencies with negative interest rates.

Managers of $6 trillion in reserves for the world’s central banks are pulling out of jurisdictions where interest rates have turned negative and pushing into riskier assets to make up for the lost yield, according to a survey by Central Banking Publications.

The reserve managers are favoring the dollar as stronger growth drives yields higher in the U.S. relative to the euro area and Japan, where policy makers have turned to negative interest rates to spur flagging economies. The 77 reserve managers who participated reported increased investment in both equities and the Chinese yuan, while pulling back from other emerging market currencies. For a minority, higher-rated corporate bonds, covered bonds, gold and other currencies have also entered the toolkit.

What negative rates mean for the Forex markets the flight of capital out of deflationary economies.

How to Save, or Not, when Rates Are Negative

No one in the West has ever had to deal with a persistent deflationary environment  and negative interest rates so what do you do when the bank charges your for deposits and pays you to take a loan? Forbes writes about how negative rates affect consumer savings.

BlackRock CEO Larry Fink recently lamented that low interest rates are hurting the economy by depressing the returns that consumers earn on their savings. As a result, he reasoned, people will have to save more than they otherwise would to meet their retirement savings objectives. That means less consumer spending, an essential ingredient for vigorous GDP growth.

The other side of coin is that negative interest rates might just kill savings accounts.

“In theory, the negative rates should prompt people to spend their money or hoard it in cash, rather than save it at a bank and watch it shrink.”

Or savers and investors might look to riskier investments to get a positive rate of return. Folks who are going to save will go ahead and find the best solution for them such as keeping cash or property when rates are negative.

What Happens with the USD?

So long as the USA has positive interest rates and the best of a bad lot regarding global economies money will flow into the USA and into US dollars, driving the USD up in comparison to negative interest rate companies.

And What Happens to Individual Savers?

Negative interest rates in Europe and Japan have to do with bank to bank transactions. That does not mean that home town banks are charging interest on savings and checking accounts. Deflation will need to get a lot worse in Europe and Japan for this to happen. If and when individuals need to pay to have the bank hold their money we can expect to see a wide spread run on banks. And those with the assets and ability will use the Forex market to send their wealth where interest rates are still positive.