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Negative interest rates - Explained

Caroline F
โ€ข
6.8.2021

cash, banks, finance, money

Image by Karolina Grabowska

Itโ€™s an interest-ing rate

In 2014, the European Central Bank (ECB) introduced negative interest rates as part of their expansionary monetary policy. This meant that the ECBโ€™s deposit facility rate (DFR), was lowered to -0.1%. But this didnโ€™t mean that those with money in their savings account had to pay an extra feeโ€ฆat least not yet.

The expansionary monetary policy is a tool used by Central banks, such as the ECB, to stimulate economic growth through lowering interest rates, reducing reserve requirements of banks, or expanding open market operations. For the consumer, it became cheaper to get a loan. Overall, aggregate demand should increase and stimulate economic growth, as money pours into the economy.

Now that the basic theory is covered, an important question remains: What happens if this policy is kept for a long time span? Seven years later, the ECB lowered the DFR even further. to reach the current rate of โˆ’0.50%. So far, banks had to face the consequences of having their reserves at negative rates, at the ECB. Some have started charging a negative interest rate from their clients, for having high amounts of money in their accounts. Now, consumers are increasingly wondering whether their money is truly safe in their bank accounts.

With negative interest rates there is no reason for oneโ€™s money to sit around in a bank account, unless allocated for daily expenses and emergencies. But, where would the best place then be to hold savings?

In reality, savings should not all be held in one place. As Warren Buffet once said: โ€œdo not put all your eggs in one basketโ€

Traditionally, alternatives to keeping cash are bonds or stocks; both areas yield promising returns in comparison. Going for bonds - especially government bonds - is less risky. However, returns from government bonds are less promising: for a 30 year maturity in a German government bond the return is 0.03%. Considering the estimated inflation rate for 2021 in the EU of 1.6% on average, consumers are almost guaranteed to lose money.

Thus, negative interest rates aim to promote spending and in return strengthen economic growth. In the long run, it also has negative effects on consumers. Those who choose not to spend all their disposable income, must find alternative ways to protect their money.

What are alternatives to the stock market?

For those looking for a suitable alternative to the stock market, or simply another basket, should consider investing in luxury assets. These have historically proven to yield promising returns, and offer a stable opportunity. Yet gaining access to such luxury assets like watches, wines and art, is extremely difficult. The most investment worthy assets are also extremely expensive; So how does one take an opportunity that seems too far out of reach?

Konvi aims to break these barriers, by offering partial ownership into alternative luxury asset classes. Starting with luxury watches, Konvi plans to expand its offering into fine wine and arts in the future. Sign up to our app to get notified about our exclusive offerings, and see what may follow next!

Disclaimer: The contents of this article have been prepared for general informational purposes only and should not be construed as financial advice.

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