What exactly is a negative interest rate? To put it simply, rather than banks paying you interest, you pay banks to store your money. Why pay to store your funds? Safety, primarily. A nest egg in a mattress is not a solid plan. Your money is also insured by the government – within its account limits – when stored at a certified financial institution.
Negative Interest Rate Policy, or NIRP, occurs when central banks drive interest rates down to support economic activity. Once the zero percent level has been reached, there is no place to go but into negative rate territory. If, in the opinion of policy makers, the economy cannot support an increase in rates, then measures can be put in place to have negative rates. Much as one would pay to house furniture in a storage facility, one then pays to store money in a bank.
“Negative rates are all part of the currency wars going on,” explained Ronald Crawford, a director in BECU's Treasury Department. “Everyone is pushing their rates down.” Crawford cited the Bank of Japan and the European Central Bank as two Central Banks currently pursuing negative rates.
“We're one of the only big countries left with positive yields on all of our bond offerings. This, coupled with the relative safety of U.S. government debt, makes U.S. bonds quite attractive,” said Crawford. “In order to buy U.S. bonds, you have to have U.S. dollars. That makes a bigger demand for U.S. dollars, which then makes the dollar stronger.”
Bottom line? There are winners and losers in a NIRP scenario, and business owners may be surprised to find themselves on the winning end. While a stronger dollar usually results in lost dollars on exports, businesses importing goods from a country at negative interest will find those goods even cheaper. “If you're a business owner and buying foreign goods, negative interest rates abroad could help drive up the value of the dollar,” said Crawford.
It's not just imports where businesses see a financial benefit: Negative interest rates also offer an opportunity for ideal loan terms. “Global yields get pushed down, lowering borrowing rates in the U.S.,” said Crawford.
The question then remains how much to borrow. Despite the favorable borrowing environment, a business is cautioned to retain enough liquidity to survive difficult times – ideally a base of at least 6 months' operating costs.
Despite the benefits, Crawford returned to the root of the negative interest rate problem: deposits. While businesses may enjoy lower borrowing rates, that perk could be offset by having to pay more to store funds. Will the U.S. economy ever face negative interest rates? Federal Reserve Vice Chairman Stanley Fischer recently spoke on the topic, stating there are “no plans to move into negative territory.” And while economic forecasters warn it is always a possibility; for now, U.S. account holders can breathe easy and look to deposit with non-negative rates.