Think interest rates could not get any lower? Brace yourself: Negative interest rates could be on their way.
In early June, the European Central Bank (ECB) took cutting interest rates to a new level, moving one key interest rate into negative territory. Though this will not affect U.S. bank rates immediately or directly, it could be a sign of things to come.
The ECB cut interest rates to try to stimulate the eurozone economy. That in itself is nothing unusual -- lowering interest rates to encourage growth has been a standard central bank tactic for decades, and has been habitual since the start of the Great Recession.
However, the latest ECB move took the extraordinary step of making one key interest rate negative. The ECB will now charge up to 0.1 percent to banks that keep money on deposit with the central bank. The move is designed to encourage banks to lend money rather than just keep it on deposit.
While this does not directly affect consumer rates, it is likely to influence them. If banks are being charged for deposits, they will not be keen to attract more deposits, and they might even start charging customers for their existing deposits.
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Would the Fed consider negative interest rates?
Will negative interest rates be the latest European fashion to catch on in America? Perhaps not right away, but the Federal Reserve has already expressed concern over the same issues that drove the ECB decision: slow growth and low inflation.
Look for hints in upcoming Federal Reserve language. It increasingly tries to blunt market reaction by signaling policy direction before taking it.
Implications for savers
It remains to be seen to what extent negative interest rates will make it to the U.S. However, the precedent puts today's low savings account rates and other deposit rates in a new perspective. Bank rates you thought could not get any lower may indeed get lower, to the point where a bank is charging you for the safekeeping of your deposits.
If you think that is the direction things are heading, here are three actions to take as a consumer:
Go long. Long-term CD rates are still higher than savings or money market rates. Still, there has not seemed like much point in locking into a long-term CD in this low-rate environment. However, if rates are headed toward negative territory, today's long-term CD rates might start looking pretty good in a year or two.
Shop around. Rate shopping is a good idea under any circumstances, but it could be especially important to do it now -- before the handful of banks offering competitive rates re-think their interest rate strategy.
Consider penalties alongside rates. While long-term CDs could save you from lower rates in the next few years, locking in for the long-term is still a risk in a low-interest-rate environment. You can reduce this risk by looking for relatively mild early withdrawal penalties, so compare those penalties as well as CD rates.
Another possible response is to abandon deposits in favor of more speculative investments. However, low interest rates have already driven the stock market to record highs, so proceed in that direction with caution. You do not want to trade the possibility of losing a fraction of a percent for the possibility of a double-digit loss.
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Below zero: The future of bank rates?