By Anessa V. Cohen
 Negative interest rates have become the latest buzz. The Europeans have started issuing them to their central financial markets, and the Japanese are playing around with using them. What does this mean, and where did this suddenly come from?
A negative-rate strategy comes about when a country drops its key interest rate to yield below zero percent, effectively creating a negative interest rate instead of a positive interest-rate yield, which is what we are all accustomed to.
What exactly happens when this kind of policy is enacted by the financial markets in a particular country? To give but one example, it would create a situation where a person goes to the bank to make a deposit, and because the negative interest rate is now policy, instead of earning interest on a bank account, the bank depositor would have to pay a rate created by the negative rate in order to keep their money as a depositor in a bank.
Sound ridiculous? By our standards and what we are used to in our everyday lifestyles, this would probably turn banking as we know it upside down!
On January 29, the Bank of Japan surprised markets by adopting a negative-interest-rate strategy. The move came one and a half years after the European Central Bank became the first major central bank to venture below zero.
With the fallout limited so far, policymakers are more willing to accept subzero rates. The European Central Bank cut a key rate further into negative territory on December 3. It now charges banks 0.3 percent to hold their cash overnight.
Sweden also has negative rates, Denmark used them to protect its currency’s being pegged to the euro, and Switzerland moved its deposit rate below zero for the first time since the 1970s.
Since central banks provide a benchmark for all borrowing costs, negative rates spread to a range of fixed-income securities. By the end of 2015, about a third of the debt issued by eurozone governments had negative yields. That means investors holding to maturity might not get all their money back.
Although we have been hearing a lot of talk here in the United States about the pros and cons of even considering this type of drastic financial direction, it seems that for now this is not being considered as the next experiment for sparking the economy.
In theory, interest rates below zero could reduce borrowing costs for companies and households, driving demand for loans. But in practice, there is a real risk that the policy might do more harm than good.
If banks try to make more customers pay to hold their money, many would probably rebel, and you would find all kinds of new “how-to” articles about how to “stash the cash” under the mattress instead.
Janet Yellen, the U.S. Federal Reserve chair, said at her confirmation hearing in November 2013 that even a deposit rate that’s positive but close to zero could disrupt the money markets that help fund financial institutions. Now, two years later, she said that a change in economic circumstances could put negative rates “on the table” in the U.S.
Deutsche Bank economists note, though, that negative rates haven’t triggered the bank runs or cash-hoarding some had feared, in part because banks haven’t passed them on to their customers. But there’s still a worry that when banks absorb the cost themselves, it squeezes the profit margin between their lending and deposit rates, and might make them even less willing to lend.
I think this negative-interest-rate business bears close watching to see if its popularity amongst economists becomes stronger or falls by the wayside like so many other crazy ideas.
Anessa Cohen lives in Cedarhurst and is a licensed real-estate broker and a licensed N.Y.S. mortgage broker with over 20 years of experience, offering full-service residential and commercial real-estate services (Anessa V Cohen Realty) and mortgaging services (FM Home Loans) in the Five Towns and throughout the tri-state area. She can be reached at 516-569-5007 or via her website, www.AVCrealty.com. Readers are encouraged to send questions or comments to anessa@AVCrealty.com.
