Interest in Interest

If a loan manager offered you a mortgage at -0.75% interest, would you wonder if you heard correctly? If you were in a bank in Denmark, you probably did.

In Denmark, Jyske Bank has launched the first negative interest mortgage ever. At first, it was marketed at -0.5%. This week, they pushed it to -0.75%.

For borrowers who take advantage of these mortgage terms, their monthly loan repayments will decrease, rather than increase.

When Jyske Bank launched the mortgage, they were flooded with “how is that even possible?” questions.

The Danish central bank has cut its interest rates to negative levels. As a result, Jyske Bank gets its money at a negative interest rate, and it then passes that rate onto its customers.

While borrowers will still end up paying more for the loan than they took out, this will only be due to fees and service charges. They will still pay a lot less than if they were charged a normal interest rate of 3-5%.

Do you suddenly have an urge to move to Denmark? Not so fast.

As the global economy slides, could Australia end up with negative interest rates too?

We’ve got a sickly economy on our hands. All the key indicators of economic health are at or near 10-year lows. None seem to be improving any time soon. 

Following two back-to-back rate cuts last year, the Australian cash rate is at 1%. This is the lowest figure ever. The RBA now equates a neutral nominal cash rate of around 3.5% (see under ‘Considerations for Monetary Policy’).

And that’s not all. Last week, the Bureau of Statistics revealed the unemployment figure has increased to 5.3%. It’s been increasing every month since February. The Australian Reserve Bank (RBA) said that if it went above 5.2%, there’d be a cause for concern. As a result, NAB and ANZ both expect the central bank to slash rates to 0.75% in November.

Phillip Low, the RBA Governor, told Parliament that negative interest is a very real possibility if serious measures are not taken to improve the economy. In the best-case scenario, he stated that interest rates are likely to hit 0.25% in 2020.

 

But, there could be a silver lining in this economic doom and gloom.

It points to a correction in the Australian housing market. If you’re thinking about taking a mortgage, now might be a good time. If you’re an optimist in a pessimistic world, you might even want to wait a tad longer. But if you rely on the interest you make in your savings account, you look to be in trouble.

All of this is in-line with a global trend. 

30 central banks have tried to stimulate their economies with record-breaking low-interest rates. They’re calling these cuts ‘non-conventional’ monetary measures, which is a euphemism for ‘we’re heading for a waterfall and we can’t find our paddle.’  

Japan has been sitting at interest rates of -0.1% since 2016. While they decided to keep their monetary policy on hold last week, there are hints of taking further fiscal measures in October.

The UK is not doing much better at 0.75% interest and more cuts are likely in the face of Brexit.

Last week, the US Federal Reserve cut its rates for the second time in as many months. This marked the first interest rate cuts since the GFC and Trump is urging the Reserve to dip into negative territory.

Most of the early indicators that have predicted economic downturns in the past are pointing to another potential fiscal freefall. This includes the USA’s  ‘FRED Spread’ which inverted for the first time since 2005 – just when murmurs of the GFC arose. This inversion has come approximately 22 months before every recession over the past 50 years.

0% or negative interest rates are usually a last-ditch effort to stimulate the economy.

We’re going to be facing some sluggish economic times for a while yet. The burning question: Is it finally going to be a buyer’s market for Australian housing?