Why negative rates?

The world struggles to survive through an oil crisis. The oil crisis has become the everyday routine since July 2014. Financial institutes are in danger, while the global economy is slowing down. Banks choose to reduce their interest rates below zero in an attempt to get a breath of fresh air as in a February morning. Even the Bank of Israel will join The Negative Interest Rates club within three months, forecasts Citibank. There are 5 club members at the moment: central banks of Denmark, Sweden, Switzerland, Japan and Europe.

Why negative rates? Why powerful banks prefer to charge their customers for saving money? Here are 4 reasons to do this.

1.    In the EU inflation continues to hover close to zero. The growth of retail sails in the Eurozone has dropped down every month since September 2015, so people are satisfied with their belongings. Meanwhile the Europeans do not spend a lot on cars or homes. The numbers of the recently sold units are modest. The money escapes from the markets. How to bring euros back and force them to work, to fund the industry and consumer service? Just push the inflation higher. Show the people how their euros meltdown in their bank accounts. When you need to pay for a deposit, you are loosing money for nothing. Better to pay out for goods and pleasure.

2.    The manufacturing often lacks of funds, as well as the industry. The time and efforts are required to get a profit in the industry. And funds of industrial companies are hard to manage. Thus, banks take care of corporate funds, loans, lending. Banks are in charge for saving funds in the fast moving financial environments. To stimulate a producer to apply for a loan a bank drops an interest rate. The ECB behaves like that, and the Bank of Japan got started to run the scrip.

3.    The global stock market has been suffering in January and was bleeding during the last week. Thanks to shares and stocks the money is collected from investors, even from small ones, but the investors prefer to play for safety. Shares and stocks put investors on guard because of the risk to sustain losses in the volatile market and the unpredictability of the global economic situation. A large investor can arrange the portfolio and manage the risk, supporting the market. Who are professional investors and money managers? Banks and financial institutions are. A bank gets the motivation to participate in the market with negative interest rates. Instead of saving deposits the bank will start working with assets. That what they do in the European Central Bank and in the banks of Denmark, Sweden, Switzerland and Japan as well.

4.    The Fed has initiated rates hike in December 2015 after holding interest rates close to zero for seven years. The loans in USD are going up, so American shares and stocks will cost more. Since December 2015 the globe is dealing with two contradicted monetary policies: the dropping European and the hiking American. The existence in the bipolar financial world is complicated, national banks work out a strategy to support their currencies and to stimulate national economy. At the same time the banks provide funds for purchase commodities. For the commodities you spend USD. Commodities price in case you need to buy USD beforehand is higher, just because everyone must pay a fee buying a currency. Thus, when a commodities buyer is short in cash, but businessmen and citizens hold money in the bank accounts, negative rates will solve the problem for strong countries.

The Citibank expects new members in The Negative Interest Rates club soon. Israel will join within three months, the bank analytics said. The central banks of Czech Republic, Norway and Canada will knock at the door. The countries with strong economies involved in the global process will adopt the widespread strategy. 

A different world has surrounded us since July 2014, when oil prices have rushed to the bottom on the chart, then shares of energy giants dropped down along with the economy of “petrodollar addicted” countries. The global markets adjust the trend looking for the less painful way to transform the economy. Unfortunately, nobody is able to foresee a result.