Banks seriously considering negative interest rates on normal people’s savings

Apparently, European central banks are now imposing negative policy interest rates for inter bank dealings. The European economy is so stagnant that interest rates for banks depositing money into another bank will earn -2%.


Theoretically, lower interest rates for borrowing money results to increase in money supply circulation in the market due to the cheap cost of borrowing money. Consequently, inflation is expected to rise as more people spend their money. Right now, interest rates are as low as ever. 4-5% per annum was simply unheard of 5 years ago.

Despite the low interest rates, inflation did not rise that much i.e. prices of goods and services doesn’t rise that much, largely due to the major drop in fuel prices. With a move to decrease policy rates further, banks are contemplating whether it’s time to pass on the negative cost of saving to individual depositors like you and me. What to do? Other than giving up and just storing money in your basement, here are some alternative places to keep your money. I use the term “alternative” loosely as the bank deposit’s liquidity (ease of withdrawal) is quite difficult to replace.

Alternatives to bank deposits:

(1) government treasury bills or treasury bonds – These work like a deposit such that your moeny is risk-free and totally guaranteed by the Philippine government. Drawbacks: your money is locked in for a period of time and your pay a pre-termination fee if you terminate before the period set.

(2) corporate bonds – These represent corporations’ indebtedness and give periodic pay outs called coupons, akin to a cash dividend.

(3) stocks – These are the most risky form due to their prices’ volatility. Like coupon bonds, these pay out cash dividends, depending on whether the company made a profit.

Your choice really depends on your tolerance for risk and your liquidity needs.

A final note, I really doubt whether banks will impose negatve interest rates for individual bank depositors like us. First, they will effectively lose their source of cash for use in their banking business ( loans). Second, there will be a risk of bank runs. Third, people will have more incentive to just hoard their money and thereby remove it from circulation within the economy. A probable consequence would be a further contraction of the global economy.

20 something lawyer


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