Negative interest rate

Investors snapped up gold at a record pace in the first three months of 2016 as global growth fears intensified and central banks slashed interest rates deeper into negative territory, reports The Telegraph. According to a South China Morning Post article, Fitch Ratings, the credit rating agency, cautioned on May 4 that negative rates are constraining the ability of long-term institutional investors to generate returns.

This followed a warning by the Bank for International Settlements (BIS), the central bankers’ bank, in early March that “there is great uncertainty about the behaviour of individuals and institutions if rates were to decline further into negative territory or remain negative for a prolonged period.

RBI Governor Raghuram Rajan also said that Euro zone and Japanese interest rates in negative territory have done little to help growth or inflation, causing some bankers and finance officials to speculate that policymakers will deploy 'helicopter money.'

A negative interest rate means the central bank and perhaps private banks will charge negative interest: instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank. This is intended to incentivize banks to lend money more freely and businesses and individuals to invest, lend, and spend money rather than pay a fee to keep it safe.

UBS executives have been among the most vocal of major European bankers to warn about the consequences of negative interest rates. Faced with very low inflation, or even falling prices, more central banks have resorted to negative rates on bank deposits stored with them. Switzerland’s central bank has been particularly aggressive with this tool, having maintained a -0.75% deposit rate since January 2015.

Central banks in the eurozone, Denmark, Sweden and Japan have also gone this route. One consequence of negative rates is that they make a country’s assets less attractive to investors, which may weaken the currency and boost both exports and prices of imported goods.

But it poses problems for financial institutions that face penalty rates from their central banks while being constrained from passing negative rates on to retail customers. Switzerland’s biggest banks have seen their share prices decline since the country’s central bank set a -0.75% deposit rate on Jan. 15, 2015. Japan’s banks have also lost ground since that country’s central bank turned to negative rates in late January, writes Wall Street Journal.