Negative Interest Rates: Warning, Your Bank Account is Under Attack


The European Central Bank (ECB) just went negative — and that’s not going to be good for your money.

Last week, the ECB distinguished itself as the first major central bank ever to implement what’s called “negative interest rates,” which means the ECB will actually charge depositors to keep their money at the central bank. Effective June 11, the ECB deposit rate will drop to -0.1% from 0.0%.

The goal of this negative interest rate policy is to try to financially engineer the decisions of banks to lend out money to business and households. By doing so, the ECB hopes to promote more economic activity in Europe, and to combat the increasing threat of disinflation.

Now, as a skeptic of both the efficacy and the effectiveness of central bank action in the economy, it’s easy to read the ECB’s decision as an admission of failure of its current loose monetary policy. Still, as an investor and a market watcher, I must acknowledge the immediate ramifications of the ECB’s latest move.

The first short-term consequence of the negative interest rate policy is likely to be bullish for risk assets such as stocks, and, in particular, riskier small-cap stocks. In fact, we witnessed this effect last week, as the small-cap Russell 2000 Index surged some 2% on Thursday, June 5, following the ECB news. The other potential short-term outcome is a stall in rising bond prices, and a potential rotation out of so-called “bond proxy” sectors such as defensive stocks and utilities.

Yet, aside from the immediate investment implications of the ECB’s actions, there is a much more troubling, and much more pernicious, potential outcome for the average person who just wants to keep his or her money safe in a savings or checking account.

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You see, banks that want to keep their money at the ECB will almost certainly pass the added cost directly to existing consumers.

One way European banks may pass along these costs is by reducing the interest rate paid on customer deposits to virtually zero, and then charging something akin to a maintenance fee just for having an account.

Now, you might be thinking that you don’t have to worry about this, as you don’t have your money in a European bank. You have it in an American bank. Well, think again. This is a global economy, and U.S. banks also will be affected by the ECB’s negative rate policy. They too will almost certainly try to pass on the added cost of doing business to consumers.

In the USA, we are more-likely-than-not going to get the negative rates directly passed to consumers by the banks who will claim it is the Fed who will do so at the requests of the banks,” writes economist Martin Armstrong.

Armstrong further explains, “Like airlines who turned against their customers with huge fees to cancel tickets adopting the predator tactics of the money center banks that always traded against clients, the U.S. version of negative rates will be your bill. We are more likely to see ‘fees’ rise on accounts with zero rates of interest or 0.01% without calling it negative.”

The bottom line here is that, once again, a central bank decision has direct implications for you, and your money. The banks aren’t stupid. They are going to make up the money they lose from the lack of ECB and Federal Reserve interest payments. Ultimately, that means the real loser here is anyone with a bank account — and especially anyone who isn’t investing in order to take advantage of the distortions created by central bankers around the globe.

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Jim Woods is Editor-at-Large of You can follow him on Twitter: @Woodsish.

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