Authored by Mark Cliffe, originally posted at VoxEU.org,
As
doubts grow about the effectiveness of quantitative easing, monetary
policymakers are leaning towards cutting interest rates further into
negative territory as their preferred mode of easing. But this
begs crucial and untested questions of whether banks will be willing to
pass on the cost to their retail depositors, and of how depositors might
react if they did so. This column notes a recently published
survey in which a large majority of respondents said that they would
withdraw their savings, and yet few would spend more. Although
it could be argued that savers might react less negatively when
confronted with the reality of negative rates, their powerful aversion
to the prospect raises troubling questions about the potential effectiveness of this policy tool.
In their struggle to keep up the momentum of economic growth, central
banks are turning to negative interest rate policy (NIRP) as their
weapon of choice. Amid doubts about the impact of further large-scale
asset purchases, the Bank of Japan (BOJ) has recently followed the ECB
and other European counterparts in imposing negative rates on the
reserves that banks hold with them. Meanwhile, weak economic data has
even prompted talk of the Federal Reserve potentially having to reverse
course and join the NIRP club.
But there are doubts about NIRP too. In particular,
if banks resist passing on negative rates for fear of triggering a
deposit flight, they will fail to incentivise savers to spend. NIRP
could still work via boosting asset prices or driving down the exchange
rate, but, as the BOJ has discovered, this is a confidence trick that is
liable to succumb to the vagaries of financial market sentiment.
So are the banks right to fear the zero lower bound (ZLB)? The
obvious problem is that we have no experience to go on, since no bank
has been brave enough to breach it in a significant way. The banks are
clearly concerned that cutting savings rates below zero would lead to a
customer backlash and significant withdrawals of deposits. But with loan
rates often contractually linked to money market rates, shielding
savers from lower rates comes at the cost of bank profitability, capital
generation, and willingness to lend. This, in turn, blunts the intended
stimulus that the central banks are trying to deliver by lowering
rates.
So the response of retail customers to negative interest rates remains largely untested. In an attempt to fill this gap,
ING commissioned IPSOS to survey
around 13,000 consumers across Europe and – for comparison purposes –
in the US and Australia to ask them how they have responded to low
interest rates and how they might react to negative interest rates (ING
2016).
Such surveys have an obvious drawback: there is inevitably a gap
between what people say and what they do – inertia often kicks in.
Nevertheless, the results are remarkable. They indicate that zero is a
major psychological barrier for savers. No less than 77% said that they
would take their money out of their savings accounts if rates went
negative. But only 12% would spend more, with most suggesting that they
would either switch into riskier investments or hoard cash ‘in a safe
place’.
Survey highlights
1) Response so far to low savings rates
In order to provide a context for the consumer reaction to the
possibility that savings deposit rates might go negative, the survey
began by asking respondents about how they have responded so far to low
interest rates.
Figure 1. Nearly a third of savers have changed their behaviour due to low rates
Source: ING International Survey (IIS)
It asked whether the low rates had prompted a change in their
behaviour and, if so, how. Across the 15 countries surveyed, 31% of
respondents said that they had changed their savings behaviour (see
Figure 1). The figures were higher in Eastern Europe, the UK (37%) and
Turkey (47%), where rates have traditionally been higher or more
volatile.
As to how savers had changed their behaviour in the light of low
interest rates, the most popular answer, accounting for 40%, was that
they were saving the same amount, but had switched to longer-term forms
of saving (see Figure 2). Across countries, the highest proportion of
respondents to have made this switch was in the UK, with 49%, and the
lowest was in Austria, with 28%.
Figure 2. How have you changed the way you save?
Source: ING International Survey
The next most popular response, at 38%, was from those who have been
saving less – the response most desired by the central banks. That said,
‘saving less’ does not necessarily translate fully into ‘spending
more’, particularly for those households relying on interest income.
Meanwhile, the survey showed that a significant minority – namely 17% – of those who have changed their behaviour have actually
increased
their saving in response to lower rates. This may reflect the fact that
the lower income resulting from lower rates may be making life harder
for those who have target income or long-term savings goals, forcing
them to save more to compensate.
Interestingly, US savers came out top on this account, with 26% of
‘changers’ having increased their savings, as many as those who had cut
their savings. Lacklustre income growth may be partly to blame here. By
contrast, only 5% of the Dutch had increased their savings.
2) Response to a possible move to negative savings rates
The survey then asked how they might react if rates went negative. Although there is room to doubt if all respondents might
actually
react as they say if this became a reality, the strength of feeling
revealed by the survey is striking. Only 23% of the total sample said
that they would do nothing in response (see Figure 3). This compares
with 69% of the sample who said that they have not changed the way that
they save in response to low interest rates so far. The survey suggests
that crossing the zero bound is a major psychological shock to
consumers.
The negative reaction to the possibility of negative interest rates
is an interesting application of the behavioural economics concept of
‘loss regret’. Feelings evoked by seeing interest rates cut from, say,
zero to -0.5% are stronger than those from 1% to 0.5%. The difference is
that the former is perceived as an outright loss, while the latter
merely as a smaller gain.
There are also political and cultural dimension. Many will see
negative rates as an unfair ‘tax’ on small savers, particularly in
cultures that celebrate saving as a virtue. In this respect, a
significant minority of 11% would save more (Figure 3)
Figure 3. Nearly 80% of savers would respond to negative interest rates
Notes: Weighted by country, age, gender and region,
significance tested on 95% level. As respondents were allowed to choose
more than one answer, the country total may exceed 100%.
Source: ING International Survey
Figure 4 shows only those who plan to move at least some of their
money out of savings accounts (some 78% of the respondents). Some 10%
would spend more, almost exactly matching the proportion of those who
intend to save more. The remainder are almost evenly split between those
who would switch into alternative assets or simply put their savings
‘in a safe place’.
In other words, around 40% who would respond to negative rates (or
33% of the total sample) said that they would hoard cash. In the
Netherlands, France and Belgium, this proportion rises to more than 50%.
Figure 4. Switching into investments and hoarding cash are the most popular options
Note: As respondents were allowed to choose more than one answer, the country total may exceed 100%
Source: ING International Survey
Assessment
This survey makes sobering reading for both banks and central banks.
For the banks, the results suggest that they might be right to be
reluctant to cut rates below zero. Only 23% of savers would not react,
and a smaller proportion still would save more. Four-fifths would move
at least some of their money out of their savings accounts. Some of this
might find its way into other bank products, but more than a third say
that they would take some of their money out and hoard it.
The strength of the responses perhaps reflects the immediate shock of
being confronted with the unprecedented possibility of incurring a
charge to keep savings in bank accounts. Provided rates went only mildly
negative, say no more than -0.5%, or the cuts were perceived as
temporary, then the reaction might, in practice, be milder than the
survey suggests.
Banks would be faced with an uncomfortable choice between not cutting
retail rates below zero, and so seeing their profit margins squeezed,
and doing so and risking a substantial deposit outflow.
1 They
might perhaps mitigate a profit squeeze by raising fees, or increasing
the cost of mortgages, as some banks in Switzerland have done. However,
these would undoubtedly also meet with customer resistance and official
consternation.
Moreover, even if the banks dare to pass on negative rates to retail
savers, the stimulus to spending would be far less than the rate cuts so
far. Indeed, in the total sample, marginally more (11% versus 10%) of
respondents said that they would save more, not less, in the event of
negative rates.
Figure 5. Reaction to negative rates also depends on income
Source: ING International Survey
One important caveat to this is suggested by the disaggregated
results of the survey. These show that richer, older, and more educated
respondents would be more inclined to spend than other respondents in
the event of negative rates (Figure 5). Since these groups tend to have
higher savings levels, more spending by them would more than likely
offset lesser spending by the poorer, younger, and less educated groups,
giving a greater stimulus to spending.
Nevertheless,
the results strongly suggest that the cuts
in interest rates below zero are likely to give a smaller boost to
consumer spending than cuts in rates above it.
Moreover, they also highlight the unpredictability of pursuing NIRP.
With the credit channel weak or blocked, central banks have been relying
largely on rising asset values and weaker exchange rates to provide the
needed stimulus. But the BOJ’s recent adoption of NIRP has had the
opposite effect. Evidently, the initial market reaction has been to see
it as an act of desperation. The risk is that this negative sentiment will infect the real economy, serving to depress spending.
If so, the danger is that NIRP will have an impact on economic growth that is not merely non-linear, but perversely negative
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