By now, almost all Aussies would be familiar with our record-low interest rates in one way or another. Whether it’s a mortgage costing a homeowner just 2.5% per annum or a term deposit paying 1%, low interest rates have certainly worked their way into everyday life.
But according to reporting in the Australian Financial Review (AFR), we might not be at the end of the road just yet.
But how is that possible given interest rates are at just 0.25% – one cut above zero?
Well, according to the AFR, the Reserve Bank of New Zealand (RBNZ) is in discussions with our ‘big four’ banks, including Commonwealth Bank of Australia (ASX: CBA), in “getting their systems ready” for the possible introduction of negative interest rates, which the RBNZ said, “will become an option” in early 2021.
The AFR quotes the RBNZ as stating: “The committee noted that a negative official cash rate will become an option in the future, although at present financial institutions are not yet operationally ready”.
What are negative interest rates?
If negative interest rates did become a reality across the ditch, our own Reserve Bank of Australia might be forced to follow suit.
Negative interest rates result in a strange situation where borrowers are actually paid to borrow and savers are penalised for saving. We have already seen this paradigm play out in recent years across a few countries, especially in Europe and Japan.
Aside from some odd consequences that we may see (such as cash hoarding), negative rates would probably be a tailwind for ASX shares. That’s because negative rates narrow the range of assets which investors can use to generate real returns to essentially just shares and property. As discussed earlier, bank accounts and term deposits are out, as would be government bonds. What would you rather, some shares of Woolworths Group Ltd (ASX: WOW) yielding 2.95% per annum or a term deposit that costs you 1%?
The answer’s obvious. Thus, if we did see negative rates in Australia or even New Zealand, I would expect demand for ASX shares to rise, with the possible exception of ASX banks.
Negative rates would be terrible for our banks – who will have to try and turn a profit by convincing customers to keep their cash with them for no reward or even under financial penalty, rather than under the mattress.
When a bank has to compete with the bedding for your cash, it’s not a good sign!
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More reading
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Woolworths Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The post Negative interest rates coming? Here’s what it would mean for ASX shares appeared first on Motley Fool Australia.
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