The COVID-19 pandemic has seen plenty of unconventional recovery schemes. Who could have predicted, this time last year, that the UK government would be paying Brits to go to restaurants, or repair their bikes? But in these strange times, many countries are also re-examining ideas they might have scoffed at previously – such as negative interest rate policy, or NIRP.
In May, President Donald Trump told reporters: “I feel strongly we should have negative rates.” And according to a recent report in the Sunday Times, Bank of England governor Andrew Bailey considers NIRP ‘one of the potential tools under active review.’ As a recent leader in the Guardian pointed out: “When the Bank of England governor says he is not ruling out a cut in the cost of borrowing to below zero, you know there is trouble ahead.”
NIRP is the opposite of interest rates. We are used to a bank’s rate of interest determining how much we will earn by depositing our money with the bank, and how much we will pay the bank for taking out a loan.
But if interest rates drop below zero, the opposite happens. We have to pay to deposit our money at the bank. And the bank has to pay us to take out a loan – meaning that we actually pay less than we borrowed when the term is up. In 2019, Denmark’s Jyske Bank became the first bank in the world to offer a mortgage with a negative interest rate of minus 0.5%.
It might sound profoundly odd. Indeed, a 2019 report from PNC Insights refers to NIRP as ‘the Upside Down’ – the alternative dimension of reality from the Netflix show Stranger Things. But in fact, several developed countries have been using it for over a decade: the European Monetary Union (EMU), Denmark, Sweden, Switzerland, and Japan all implemented NIRP following the 2008 financial crash in an attempt to reduce borrowing costs, raise inflation and stimulate growth.
Carrot or stick?
And as the coronavirus pandemic accelerates, economies across the world are staring down the barrel of further lockdowns – or, at the very least, consumers too fearful to venture out and spend. Desperate times call for desperate measures.
As John Moncrief summarises for Goldprice.org. “If institutions and consumers remain unwilling to lend or spend, economic conditions will generally worsen, and those actors will become even more hesitant to participate in the financial system and this creates a deflationary spiral.
“If super-low interest rates aren’t proving to be enough of a ‘carrot’ to drive spending, maybe the ‘stick’ of penalising savers by charging deposits will do the trick.” However, he also notes that those countries which have implemented NIRP haven’t exactly experienced roaring growth since.
While negative interest rates are great for those who want to borrow and spend, they’re a nightmare for savers. Many already feel that they’ve got a raw deal from over a decade of historically low interest rates worldwide, following the 2008 financial crash. And coronavirus has only added to their woes. The UK’s rate was cut to just 0.1% in response to the crisis – a record low.
Banks have been traditionally cautious about passing these costs on to savers. UBS and Credit Suisse, for example, only impose negative rates on deposits of more than two million Swiss francs. But COVID-19 has seen the rule book torn up and thrown out on more than one occasion. In February 2020, just 41 German banks charged customers for negative interest rates. Two months later, more than 80 are charging.
Under the mattress
So, what alternative do savers have in a NIRP environment? If it’s costing you to keep money in a bank, you might be considering the simple but rather risky option of taking it out and stashing it under your mattress. That’s a very real concern for policymakers. But another option is to invest in gold.
That wasn’t an option for most a few years ago. But now, sites like Goldex allow anyone to buy and sell gold without having to ever visit a vault. Always regardied as a safe haven in uncertain times, 2020 has seen gold reach a record high of $1944 per ounce, a gain of around 27 per cent since the beginning of the year.
Gold isn’t linked to the stock market, or to interest rates. There’s a finite amount of it, and it has an intrinsic value beyond just investment. So, while the world waits to see what banks will do next, savers can take action now – and make sure they’re not trapped in the Upside Down.
Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme