What’s going on guys Its Jordan de Jong here and today I want to talk about Negative interest rates, and although it sounds almost taboo and unfathomable for us here in Australia, it is pretty straight forward to comprehend. Currently, even though we are in a very low-interest-rate environment it is still a positive interest rate, so, when we store our currency in the bank they pay us interest on our savings amount, alternatively, if we pull out debt with the bank, we have to pay the interest to be able to borrow that money. When we think about a negative interest rate environment, we just flip this way of thinking around, so if we had savings stored in a bank, it would cost us money to hold it there, and if we pulled out the debt we would get paid to do so. Sounds too good to be true right, imagine getting paid money to pull out a mortgage, well that’s just the theory, there’s a long way to go before we would see anything like that here in Australia, but it still shouldn’t be ruled out as we have seen it in other country’s, which I’ll get into later in this blog. So, why would we set negative interest rates in the first place? Well, in some theorists perspective, it would stimulate spending, instead of holding currency in a bank account that’s costing us money to do so, wouldn’t we be better to just spend it now, instead of losing money by sitting it in an account. Additionally, the population is encouraged to pull out debt by getting paid to do so, which means they may have more access to credit then they would have previously, and therefore may have more temptation to spend some. In reality it just a different way of thinking, just like people with large sums of money are benefitting from positive interest rates right now, in reverse, people with large amounts of debt would be benefiting in a negative environment, theoretically, this is not advisable to get into large amounts of debt. So, It helps some and hinders others, if we did flip the switch, imagine all the retirees who were relying on living off the interest of a large amount savings, well over the last 12 months there income from interest has been cut dramatically and if we went negative, their savings would start to get cut into. Well, what about the savers? Me personally, I would probably want to keep it in cash hidden somewhere, which means its not in the banking system, its unsecure, and in a form of currency that is rapidly becoming outdated as we constantly see digital currency being used much more frequently in society. Speaking of this physical form of currency, in a bill set to pass federal parliament, cash payments over $10,000 are set to be banned in Australia, Under the proposed legislation those cause using cash above that limit would be made to carry out a two-year jail sentence. It seems a little fishy right, given we may head into negative territory and no longer want to store our cash in the bank… Well, at least that’s what some conspiracy theorists think this bill is all about. The minister in charge of the Bill, Michael Sukkar, said the laws were a recommendation from the Government’s Black Economy Taskforce as a means to prevent criminal gangs using large cash purchases of cars, houses, and jewelry to launder their gains from illegal activities. “The key focus of the Bill is reducing the ease with which organized crime gangs can operate throughout the country,” Mr. Sukkar said. Before we get any further into the depths, I want to make it clear that I am no economist, I’m just a humble civilian making an observation, nothing talked about in this blog should be considered as personal financial advice, however, if you are loving the content don’t forget to smash the like button. So, the big question, will we see negative interest rates here in Australia, I’m good friends will a couple of people who think we will, everyone’s got there own opinion, agendas, and biases, however all we can really do is sit by and try to decipher the Reserve bank of Australia’s meeting minutes and speeches. In the Opening Statement to the House of Representatives Standing Committee on Economics, on the 7th of February 2020, Governor Philip Lowe from the RBA stated that negative interest rates in Australia are extraordinarily unlikely. This is not a direction we need to go in. So although it’s extremely unlikely, it hasn’t been completely ruled out, and to put this in perspective, a couple of years ago we would have never guessed that interest rates would be at 0.25 basis points. the RBA does however recognize the consequences. In another speech Responding to the Economic and Financial Impact of COVID-19 from Governor Philip Lowe on the 19th of March 2020 he also stated that “low-interest rates do have negative consequences for some people, especially those relying on interest income.” In the same meeting, he also mentioned. At its meeting yesterday, the Board also agreed that we would not increase the cash rate from its current level until progress was made towards full employment and that we were confident that inflation will be sustainably within the 2–3 percent range. This means that we are likely to be at this level of interest rates for an extended period. It seems to me like that they are way more stubborn about not going up then actually coming down. So how could a negative interest rate society work where we can’t pull out large sums of cash but would probably do it anyway? Well an IMF blog post has proposed something worth considering. The proposal is for a central bank to divide the monetary base into two separate local currencies—cash and electronic money (e-money). E-money would be issued only electronically and would pay the policy rate of interest, and cash would have an exchange rate—the conversion rate—against e-money. This conversion rate is key to the proposal. When setting a negative interest rate on e-money, the central bank would let the conversion rate of cash in terms of e-money depreciate at the same rate as the negative interest rate on e-money. The value of cash would thereby fall in terms of e-money. To illustrate, suppose your bank announced a negative 3 percent interest rate on your bank deposit of 100 dollars today. Suppose also that the central bank announced that cash-dollars would now become a separate currency that would depreciate against e-dollars by 3 percent per year. The conversion rate of cash-dollars into e-dollars would hence change from 1 to 0.97 over the year. After a year, there would be 97 e-dollars left in your bank account. If you instead took out 100 cash-dollars today and kept it safe at home for a year, exchanging it into e-money after that year would also yield 97 e-dollars. I’ll leave a link to that blog post in the description section below so you can do some further reading, pretty interesting but would it work? Well, we are currently seeing negative interest rates in other countries. Denmark was the first country to deploy a negative policy rate in 2012 and today has banks that pay people 0.5 percent to borrow for housing. The eurozone has had negative rates since 2014; Sweden and Switzerland since 2015 and Japan since 2016. The theory behind negative rates in those economies is straightforward. Banks are required to hold a lot of cash with their central banks to protect against a ""run"" on their deposits in a moment of the financial crisis. If the central bank charges the banks rather than pays them a positive rate on those deposits they would be more inclined to lend those funds and stimulate economic activity. The two biggest experiments with negative policy rates have been in the eurozone and Japan. In Europe, the European Central Bank is charging banks 0.5 percent for deposits, and in Japan the Bank of Japan 0.1 percent. The performance of both those economies since they introduced negative rates would suggest the policy has been less than effective. The eurozone’s annual GDP growth has been about 1.8 percent since 2015 and Japan’s less than 1 percent since 2016. This is from another article by SMH released on the 2nd of June 2020, which I’ll also leave down in the description section. So, do we hold off fixing our mortgage rates to see if we go negative? What if we don’t go into negative and miss an opportunity to lock in a low rate, these are questions going through many people’s mind and I guess no one holds the answers. We are seeing fixed loans being issued with interest rates starting with a 2, variable rates are starting to creep into the 2’s but mostly start with a 3, so we would need to see the cash rate drop another 75 basis points or so to -0.5% to see variable interest rates lower than currently locked in fixed rates. And even then would the banks pass on the full rate cut, this is unknown territory for Australia and something we have never seen before, I want to know if you guys think we will have negative interest rates here in Australia, leave it down a comment below. As always, seek your own professional financial, legal, taxation & property investment advice for your current situation, these blogs are just my opinion and general in nature and should never be considered personal advice. Until next time, happy house hunting.

DISCLAIMER: No Financial, Property Buying, Legal, Taxation or Accounting Advice The Listener, Reader or Viewer acknowledges and agrees that: Any information provided by me is provided as general information and for general information purposes only; I have not taken the Listener, Reader or Viewers personal and financial circumstances into account when providing information; I must not and have not provided legal, financial, property buying, accounting or taxation advice to the Listener, Reader or Viewer; The information provided must be verified by the Listener, Reader or Viewer prior to the Listener, Reader or Viewer acting or relying on the information by an independent professional advisor including a legal, financial, taxation, accounting and property buying; The information may not be suitable or applicable to the Listener, Reader or Viewer's individual circumstances; I do not hold an Australian Financial Services Licence as defined by section 9 of the Corporations Act 2001 (Cth) and we are not authorised to provide financial services to the Listener, Reader or Viewer, and we have not provided financial services to the Listener, Reader or Viewer.