Negative Interest Rates – There’s a Canary in the Coal Mine!
Despite being a seemingly peculiar concept, negative interest rates are an already familiar reality. Historically low interest rates and unpredictable global events have forced central banks to consider previously unimaginable monetary policy tools.
Negative interest rates are symptomatic of an overwhelming reliance on central banks to resolve economic problems that were traditionally responded to by government. Since being adopted in Japan and Europe after the GFC, negative interest rates have become the in-vogue monetary policy tool of choice for many central banks. There is however one glaring problem with negative interest rates; they are easily disrupted by something we only use sparingly and have less and less appreciation for, physical cash.
The availability of physical cash encourages retail customers to hoard cash and avoid paying negative interest rates on bank deposits. Suddenly the mattress becomes noticeably firmer and a little less comfortable as households withhold cash from banks who rely on those deposits as the primary source of funding for their loans.
Inevitably, banks will seek to limit this disruption by setting retail deposit rates at or close to zero. However, since home lending rates are largely dependent on retail deposits rates (which banks will floor at zero), home lending rates are unlikely to respond to negative interest rates at all. Principally, those benefits will accrue largely to institutions and corporates who cannot disrupt negative interest rates by storing cash under the mattress. Since banks will receive their cheapest source of funding from institutions and corporates, they will be expected to pass back those benefits through lower institutional and corporate loan rates; a kind of quid pro quo if you will.
In reality, the inequitable distribution of negative interest rate benefits will likely deliver perverse outcomes. One example being that cheap funding incentivises publicly listed companies to buy back their shares, driving stock prices higher, increasing corporate returns and ultimately contributing to inequality. Retail investors will benefit from share ownership and/or KiwiSaver returns, but to a lesser extent as they wait for the real benefits of negative interest rates to trickle down.
With this in mind, the RBNZ has a unique opportunity to minimise inequality by pioneering monetary policy development. Removing physical cash and replacing it with a digital currency would go along way to relieving some of the inequalities associated with negative interest rates. Whilst a full transition away from physical cash may take some time, the benefits of advancing development of a digital currency are plentiful:
- Firstly, the transmission of monetary policy is more effective when all types of borrowers are included, not simply institutional and corporate borrowers. An equitable transmission of monetary policy would reduce the need to extend interest rates deeper into negative territory to deliver the same monetary policy outcomes achievable with positive interest rates;
- Second, digital money would be a catalyst for opening up the banking system where the rate of technological change is controlled by a few major players. Digitalisation promotes innovation and enables a broader range of financial products with tangible benefits to be delivered to customers at pace;
- Third, the cash economy that operates on the fringes of society will no longer be immune to taxation. The transparency and traceability of digital currency increases taxation revenue without needing to increase taxes on the general population; tax avoidance becomes increasingly difficult with the absence of physical cash;
- Fourth, cash is expensive to operate and maintain. The sunk capital costs associated with managing, storing and distributing physical cash across physical networks creates a significant barrier to entry to the banking system, the costs and frustrations of which are routinely borne by bank customers;
- Fifth, the recent COVID pandemic has exposed the frailties of cash-based systems whilst highlighting the reality that New Zealand already has a well-developed digital payments network. Advancing a fully digitalised currency does not require wholesale changes to our core financial infrastructure, it simply requires progressive thinking.
- Perhaps last but not least digital currencies are more secure and transparent than physical cash. Unlike physical cash, digital currencies cannot be irrecoverably lost, misplaced or manipulated without record.
As long as physical cash remains available in the monetary system, negative interest rates can never be an equitable monetary policy tool. To extend the benefits of negative interest rates beyond institutions and corporates to retail customers, central banks would need to deploy additional monetary policy and/or macro prudential tools. Alternatively, the RBNZ could directly address the canary in the negative interest rates coal mine by extracting physical cash and replacing it with a digital currency.
Building a customer base from the ground up and shaping the direction of a brand-new business is a challenging but exciting proposition. P^werFinance Chief Commercial Officer Matt Rama discusses how he’s growing awareness of the company, and how conversations with Kiwi businesses are leading to new custom solutions that are changing the way we do – and view – finance in Aotearoa New Zealand.
All companies are technology companies these days, so thriving means delivering technology improvements before your competitors. P^werFinance Chief Technology Officer Simon Hargraves discusses how he utilises technology to drive better customer experiences, making efficient use of resources to deliver product enhancements, and what it’s like working on the tech side of a fin-tech startup.
To build a successful business, you need to hire the right people and give them freedom to do what they do best. P^werFinance Chief People Officer Dean Curtis explains the process for creating a well aligned and cohesive team, lessons on building organisational culture, and how a business’s success depends on it.