Australia: Hitting rock bottom and starting to dig: The risk of negative interest rates in Australia

"There is no precedent in economic history for negative nominal interest rates, even during the Great Depression in the United States."

Hervé Hannoun's recent observation didn't stop there. The Deputy General Manager Bank for International Settlements remarked that even Keynes didn't contemplate negative nominal interest rates: "An experiment is under way in continental Europe to test the boundaries of the unthinkable in monetary policy."

Once considered an academic exercise by economists, negative interest rates have now become a legitimate policy tool for central banks around the world. The GFC and the subsequent deflationary pressure placed on the global economy has meant that a number of central banks have resorted to negative interest rates to revive economic growth. Deploying the unconventional economic tool, central banks offer negative cash or deposit rates, charging commercial banks to hold their funds overnight. This penalty on deposits is supposed to act as an incentive for banks to lend to consumers and businesses, facilitating access to capital which in turn will stimulate economic activity and inflation.

Due to the lack of global aggregate demand and seemingly no change in expectations on the horizon, central banks have flocked to lower interest rates. Five central banks, the Bank of Japan (-0.1%), Denmark's Nationalbank (-0.65%), the European Central Bank (-0.40%), the Swedish Riksbank (-0.50%) and the Swiss National Bank (-0.75%), are all offering negative cash or deposit rates. An additional cluster of central banks are narrowing in on a 0% deposit rate. As a consequence of falling interest rates, the value of negative-yielding bonds worldwide has swelled to US$12 trillion as at September 2016.


Despite offering an economic solution to low growth and inflation on a theoretical level, there has been much commentary debating the virtues of negative rates in the current global context. Negative interest rates provide incentives to move capital and investments to jurisdictions with higher yields, putting downward pressure on the exchange rate of an economy, making exports more attractive in the global market and creating inflationary pressure in the economy. However, economists warn that currency devaluation as an economic strategy is a 'zero-sum game': if enough of one nation's trade partners implement the same policy, it will be of limited effect.1

Low or negative interest rates should – again, in theory – induce corporations to undertake expansion and investment. However, some commentators doubt that corporations would drastically increase investments on the basis of a small reduction in an already low cash rate. By the end of 2015, Apple, Microsoft, Alphabet, Cisco and Oracle were collectively holding US$504 billion in cash,2 an indication that monetary policy might not be having the impact intended. Concerns have also been raised about the behaviour of investors in a low or negative interest rate environment. Investors, driven by the search for greater returns, have shifted their portfolios towards riskier assets, which may be exposing the global economy to greater financial instability and worsening its prospects of recovery.


The greatest threat posed by negative interest rates is to the financial sector, particularly to commercial banks who play a key role in regulating and facilitating economic activity. Commercial banks, in the generation of profit, induce savers to deposit funds at their institution with the promise of 'high' interest rates and then lend out that money at an even higher rate to those who require the funds. As interest rates decline, commercial banks are pressured to lower their lending rate but most continue to offer a positive savings rate to attract deposits, narrowing their profit margins. In an attempt to remain profitable, banks may be forced to reduce costs, make riskier loans and introduce - or increase - fees on current accounts.


Despite the doom and gloom emanating from newspapers and online commentary, early studies on those European economies which have implemented negative deposit rates offer positive signs. The Swiss National Bank has used negative interest rates combined with intervention in the foreign exchange market to lower the value of the Swiss franc. In 2015, exports contributed over 50% to Switzerland's GDP, whilst imports accounted for approximately 40%. This underlines the impact movements in the Swiss franc have on the prosperity of Switzerland's domestic economy. The Swiss National Bank achieved its goal: the value of the Swiss franc has been gradually declining since 2015 making Switzerland's exports more competitive in international markets.3

In Denmark, negative rates were introduced in response to large inflows of capital into the country in 2012. These inflows had been sparked by distress in the Eurozone and required the Nationalbank to purchase large amounts of foreign exchanges in order to maintain the value of the krone.4 In contrast with Denmark, inflation in Sweden had been low for a number of years and, in late 2014, inflation expectations fell further. In February 2015, the Swedish Riksbank adopted negative rates and started a quantitative easing programme.5

Despite their differences, both Denmark and Sweden present a positive case study for those concerned about the impact of negative interest rates on bank profitability. While some interest margin compression has been observed, the profitability of banks in the two countries has remained stable and even increased for mortgage banks in Sweden. Commercial banks in these jurisdictions were able to retain profitability due to a high reliance on non-deposit funding and rising non-interest revenues from areas such as mortgage refinancing and corporate advisory services.6


While Australia remains somewhat of an outlier with a cash rate of 1.5%, the risk of negative interest rates is not entirely removed from the Australian economy. The economy is facing the end of a mining and resources super-cycle, the end of on-shore automotive manufacturing and (potentially) the end of a housing bubble, leaving a sizeable dent in the country's prospects for economic growth.7

The IMF recently released a number of preliminary findings about the state of the Australian economy. Of particular concern are external risks, particularly the risk of a sharp growth slowdown in China, and the profound impact those risks could have on our local economy. Also of concern is the Federal government's priority to return a balanced budget. The IMF believes the Federal government should increase spending on growth-friendly infrastructure projects, spending which the Federal government appears unwilling to undertake at this stage.8

The Reserve Bank of Australia (RBA) has been steadily lowering the official cash rate since December 2010 to support domestic demand and facilitate a lower exchange rate. During this time, pressure has been placed on the Australia's four big commercial banks to pass on the full impact of those cuts to retail customers. Simultaneously, competition among the banks has increased for household deposits, squeezing the banks' margins. Desperate to preserve their margins, the 'Big Four' banks only lowered their mortgage rates between 10 and 14 basis points in August of this year after the RBA lowered the cash rate by 25 basis points. Analysts estimated that, by only passing on roughly half the RBA interest rate cut, the Big Four banks preserved A$917 million in combined profit.9

However, Australia's major financial institutions may not be afforded this luxury forever. If the RBA continues to lower the cash rate in an attempt to support economy activity, pressure will remain on the Big Four banks to lower their mortgage rates. In a negative interest rate environment, Australian financial institutions will need to rely upon other sources of income to retain their current levels of profit. If negative factors prevail and the Federal government and the RBA are unable to create inflationary pressure, this scenario may become a reality in our backyard.10

The one certainty is that negative interest rates are not good. The fact that central banks have moved below zero sends a signal to markets that we are in a highly stressed period of great economic uncertainty, and that the central banks are nearing the end of what they can achieve with monetary policy.


1 IMF Working Paper, 'Negative Interest Rate Policy (NIRP): Implications for Monetary Transmission and Bank Profitability in the Euro Area', Andreas Jobst and Huidan Lin, page 7

2 New York Times, ' Why are Corporations hoarding trillions'

3 Swiss National Bank, ' Monetary policy using negative interest rates: a status report', Thomas Jordan (Chairman of the Governing Board), page 5

4 IMF Working Paper, 'Negative Interest Rates: How big a challenge for large Danish and Swedish Banks?', Rima A. Turk page 5

5 IMF Working Paper, 'Negative Interest Rates: How big a challenge for large Danish and Swedish Banks?', Rima A. Turk page 6

6 IMF Working Paper, 'Negative Interest Rates: How big a challenge for large Danish and Swedish Banks?', Rima A. Turk page 19

7 The Conversation, ' Can Australia stop interest rates from approaching zero? Only with a big shift', 13 October 2016

8 International Monetary Fund, ' Australia: IMF Staff Concluding Statement of the 2016 Article Mission',15 November 2016

9 Sydney Morning Herald, ' Why more rate cuts would be bad news for banks', 1 August 2016

10 In recent weeks, in particular following the US election, the risk of negative nominal interest rates in this country has eased, with yield curves being pushed out and the RBA now appearing to hold the cash rate steady or perhaps even push it up.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Chambers Asia Pacific Awards 2016 Winner – Australia
Client Service Award
Employer of Choice for Gender Equality (WGEA)

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions