APRA expects banks to prepare for negative interest rates
The Australian Prudential Regulation Authority (APRA) wants Australia’s Approved Depository Institutions (ADIs) to be prepared just in case the Reserve Bank of Australia (RBA) cuts the country’s cash rate into negative numbers. While the RBA has said in the past that negative rates are very unlikely, given the potential impact negative rates can have on Australian banks and their customers, it is important to think about what negative rates could mean to you.
What did APRA say?
APRA consulted with FDI in December 2020 on their readiness for zero or negative interest rates and found that while most FDI are well positioned to deal with these rates, some FDI face operational challenges due to high costs and competing priorities would.
According to APRA, ADIs are expected to “take reasonable steps to prepare for scenarios where the cash rate and / or market interest rates could fall to zero or turn negative”. In particular, APRA expects ADIs to develop “tactical solutions” by April 30, 2022 to introduce zero and negative interest rates.
What did the RBA say?
The RBA has said in the past that it “has no appetite” for negative rates in Australia and that negative rates are “extremely unlikely”. Recently, RBA Deputy Governor Guy Debelle said there are two reasons why the RBA does not consider negative rates to be appropriate for Australia in the current circumstances:
“First, there is uncertainty about the effectiveness of negative interest rates, also because of the negative impact on savers. Second, and at least as importantly, there were other measures the bank could take to provide monetary incentives that we have put in place. “
What could negative interest mean for you?
Australia’s cash rate affects how much it costs lenders to provide customers with loan products such as home loans, personal loans, auto loans, and credit cards. When the cash rate falls or rises, so will the interest rates on many of these products. For example, whenever the RBA has cut the national cash rate in recent years, many mortgage lenders have passed the rate cut on to their customers.
In theory, a zero rate could mean zero-interest loans, or even loans where the bank is effectively paying interest to the borrower, rather than the other way around. For example, one bank in Denmark introduced 20-year home loans at zero percent interest, while another Danish bank offered a 10-year contract at -0.5 percent, with the borrower’s debt increasing by more than that each month Amount they pay (although there are still fees and charges to consider).
It’s also important to remember that zero or negative interest rates also affect savers. Many Australian banks already pay almost no interest on savings accounts and time deposits, although there are some higher interest rates. If the cash rate turns negative, banks could theoretically start charging customers interest on deposited savings – a scenario that could result in Aussies withdrawing their savings to cram cash under the mattress.
According to the RBA, however, banks in countries with negative cash rates have not passed these rates on to savings customers because it “made no economic or political sense to charge households and smaller businesses for the safekeeping of their deposits.”
What can you do about negative interest rates?
While the RBA has stressed that Australia is unlikely to see negative interest rates introduced, it rarely hurts to get yourself a financial health check and wonder if you would still be in a good position with Australia’s cash rate at zero or less would be lowered below it. Similar to the APRA expectations for banks, it might be worthwhile creating a plan for a negative interest rate future, including comparing financial products that best suit your changing needs.