Recently the Reserve Bank of Australia (RBA) announced an interest rate drop. Even if you do not own stocks and shares, if you do not earn millions each year, this still has an effect on you. If we run into negative rates, you may have to pay the bank to store your money.
Interest rates and what they are there for.
Banks serve multiple purposes. You can store your money there, or save, and you can take out a loan, or borrow. Both of these are not free for both parties. To store your money in the bank, and save it, the bank will pay you a “fee”. A percentage of your money is calculated and paid back to you regularly. This is your interest that you earn on savings.
This money that is stored in the bank, is used to fund loans. If someone takes out a loan (to build a house, buy a car, or whatever), they are given the money and have to pay it back to the bank, along with the “fee” involved. The cost of borrowing this money is the interest calculated on the amount borrowed (the principal).
With me so far? Pretty easy steps to here: save money and be rewarded, or borrow money and pay for that privilege.
High versus Low Interest Rates
When interest rates are high it will have an effect on what people do with their money. People who save money in the bank will earn more interest on their deposits. People who take out a loan, will have to pay more in return. Less loans are taken out in this instance as the amount repayable is too expensive and they cannot justify the repayment amount. However, more people save money as they will be earning more from their bank.
When interest rates are low, it stands to reason the opposite happens. People tend to take out more loans to begin businesses or build houses. The amount repaid is so low, more people can afford the repayment total. Savings earn less interest though, so people may not keep their money in the bank, but rather might spend more and have cash on hand.
Still with me? It’s still relatively black and white. We’re about to go grey.
Negative interest rates
This will have the effect on the banking industry of reversing everything I just said.
A negative interest rate means that when you have any savings in your bank, you have to pay them to store the funds. If you borrow money, the bank will end up paying you, in a way.
If you are used to having all your funds in your account and swiping or paying electronically everywhere you go, not only will you be paying the transaction fees for each usage, you may end up paying to store the money in the first place. So you will end up paying the bank twice to use your own income.