The war on cash is just getting started

You may have always been of the opinion that holding money, in cash, in your bank has been safe.  But not anymore!

Besides the ever present risk of bank failures (especially in Italy) we are now on the cusp of also having to deal with negative interest rates.

In a bold move on Friday 29th January, the central bank of Japan decided to move to a -0.1% interest rate for any entity that wishes to hold money overnight with the central bank of Japan. 

This follows the move by the European Central bank in 2014 and 2015 to do exactly the same. The rate for overnight deposits is -0.3%. 

You can understand the logic.  If they charge large banks to hold their deposits with them overnight then the logic would suggest that they would be more likely to invest and lend that money back out into the economy to generate a real return, and hence stimulate spending. 

NOT SO!

Switzerland and Sweden are countries with rates below zero.  If you purchase a German government Bonds then 'you pay them' for the privilege of holding it. 

Governments around the world, in efforts to stimulate growth, are using previously unused tools to try and jump start their economies. The only problem is that it is not working. 

Banks are still happy to hold their deposits overnight at central banks, and pay to do so, in the belief that is is safer there than the additional risk of lending/investing the money back out in the economy. 

My view is that we have not seen the end of this and I fully expect to see interest rates moving even further into negative territory.  -0.1% and -0.2% just does not seem to worry large commercial banks too much.  -0.5% and -1% might encourage them to do more. There is talk of -5% from the doomsayer economists of the world.  

However, don't be surprised to see overnight deposit rates at many more central banks around the world go negative before they start to rise again. 

WHAT DOES THIS MEAN FOR YOU AND ME?

This is the most important question.  As I write, none of the large commercial banks have started charging this negative interest rate back to the end customer...you and me! 

I expect them to start to do so. 

The theory states that customers, when faced with negative interest rates, will withdraw their money and hold it under the mattress instead.  However, in the rare historical episodes where this has happened reality has shown that people prefer to hold their money in the bank, even if they pay to do so.  

So, stay tuned for more of the same.  The economic stimulus experiment has not finished yet and I expect to see more in the not so distant future.

If you would like to discuss ways which you may manage your finances better or even if you would just like confirmation that what you are doing is the best for you, then you can contact me on gareth.horsfall@spectrum-ifa.com or on cell: +39 3336492356