Negative interest rates are becoming more popular as a way of giving economies a boost. Almost 25 percent of the world’s GDP comes from countries that have adopted these rates for a variety of reasons.
The European Central Bank acted to stop banks from hoarding cash and the Swiss Central Bank is using it to reduce cash inflow to safe-haven Swiss francs. Denmark wants to protect its currency against the euro and Sweden adopted it to counter inflation. The Bank of Japan has just implemented a negative rate of -0.1 percent and, in March, Hungary became the first emerging country to experiment with negative rates this year.
In the United States there’s not much chance of the Fed following suit. Labor indicators look good, with wages rising and more than 368,000 jobs added in March and April. But with the world’s volatile economy, it can’t be 100 percent ruled out.
The impact on business is interesting. Negative rates should lower the cost of loans, increasing loan demand. They also will lower the cost of capital and encourage investment, as well as lowering the discount rate on asset prices and boosting valuations.
Payment terms are likely to reduce with customers expected to embrace shorter payment cycles. Suppliers, however, might look for clauses and insist on completion of payment cycles to ensure there is no profit erosion. Additionally, discounts on early payments can be abolished. Procurement success will be linked to negative cash-to-cash cycles, allowing the business to efficiently use its working capital and have available cash on hand.
Other outcomes of negative interest rates include:
- A weakness in currency that will help in boosting exports for companies based in the regions employing negative interest rates.
- A hoarding mentality will come into business as firms start piling up inventories, as long as they don’t depreciate. They’ll need to keep track of warehousing costs.
- Check and cash payments may gain popularity. Holding checks without depositing is similar to pre-paying bills. Don’t be surprised if specialist security firms start building vaults to store cash!
Keep your eyes open.