Retirees relying on interest income have probably long resigned themselves to the fact that interest rates will not be going up any time soon, but now the spectre of negative interest rates has re-emerged.
The Australian Prudential Regulation Authority (APRA) has asked banks to prepare draft plans to deal with the possibility of zero and negative interest rates and outline any operational challenges by 30 April 2022.
In the letter to the banks, APRA executive director Therese McCarthy Hockey asked that reasonable steps be taken to prepare for scenarios in which the cash rate and/or market interest rates may fall to zero or become negative.
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The Reserve Bank of Australia (RBA), while leaving interest rates unchanged at its last meeting, has previously stated that a negative cash rate is highly unlikely.
Despite this advice, APRA believes that “irrespective of the level of the cash rate, it is possible that other interest rates determined in the financial markets could fall to zero or below zero at any time”.
Banks responded to the APRA request for their preparedness for zero and negative interest rates by explaining that retail lending and deposit products would pose “operational challenges”.
The banks also said that high costs and competing priorities would make implementing permanent solutions for these products difficult.
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Ms McCarthy Hockey said that insufficient preparation for the possibility of zero and negative interest rates could have an adverse impact on a bank, its customers and the markets in which it operates.
APRA expects banks at a minimum to develop tactical solutions to the scenario by 30 April 2022.
“Tactical solutions are typically shorter-term fixes, involving workarounds on the periphery of existing systems,” Ms McCarthy Hockey explained in the letter.
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In developing tactical solutions, APRA expects banks to consider all aspects of the products and activities including customer communications and disclosures.
“(Banks) should assess the associated operational risks and ensure that there are appropriate controls in place to manage them,” the letter explained.
“(Banks) should also consider any relevant conduct-related issues, including the potential for conflicts of interest, fair treatment of clients, and asymmetry on information.”
The RBA has not moved the cash rate since reducing it to a record low of 0.1 per cent in November 2020, and has previously stated that it believes it will stay at that level until 2024.
Until the banks develop their formal plans for negative interest rate scenarios, it is anyone’s guess as to what it will mean for bank customers.
It may be possible that depositors could be charged for placing funds in the bank, but it is worth noting in other countries that opted to send interest rates negative, none have taken that option out of a fear of losing customers.
Do you think interest rates will go negative in Australia? What could it mean for your retirement plans? Why not share your thoughts in the comments section below?
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