APRA expects banks to prepare for negative rates

The Australian Prudential Regulation Authority (APRA) wants Australia’s authorised deposit-taking institutions (ADIs) to be prepared just in case the Reserve Bank of Australia (RBA) cuts the nation’s cash rate into negative figures. While the RBA has said in the past that negative rates are highly unlikely, the potential effects of negative rates on Australian banks and their customers mean that it’s important to think about what negative rates could mean for you.

What has APRA said?

APRA consulted with ADIs in December 2020 around their level of preparedness for zero or negative rates, and found that while most ADIs are well-placed to deal with these rates, some ADIs would experience operational challenges from high costs and competing priorities.

According to APRA, it’s expected that that ADIs “take reasonable steps to prepare for scenarios in which the cash rate and/or market interest rates may fall to zero or become negative.” Specifically, APRA expects ADIs to develop “tactical solutions” to implement zero and negative rates by 30 April 2022.   

What has the RBA said? 

The RBA as said in the past that it has “no appetite” for negative interest rates in Australia, and that negative rates would be “extraordinarily unlikely”. More recently, RBA deputy governor, Guy Debelle, said that there are two reasons why the RBA does not see negative rates as appropriate for Australia in the current circumstances:

“First, there is uncertainty about the efficacy of negative interest rates, including because of the negative effect on savers. Second, and at least as important, there were other actions that the Bank could take to provide monetary stimulus, which we have taken.”

What could negative rates mean for you?

Australia’s cash rate affects how much it costs lenders to provide customers with credit products, such as home loans, personal loans, car loans and credit cards. When the cash rate falls or rises, so do the interest rates on many of these products. For example, whenever the RBA has cut the national cash rate over the past few years, many mortgage lenders have passed the rate cut on to their customers.

In theory, a zero cash rate could mean interest-free loans, or even loans where the bank effectively pays the borrower interest, rather than the other way around. For example, one bank in Denmark introduced 20-year home loans with zero per cent interest, while another Danish bank offered a 10-year deal at  a rate of -0.5 per cent, where every month the borrower’s debt is reduced by more than the amount they pay (though there are still fees and charges to consider).

It’s also important to remember that zero or negative rates also affect savers. Many Australian banks already pay close to zero interest on savings accounts and term deposits, though there are a few higher rates available. If the cash rate moved into negatives, banks could theoretically start charging customers interest on the savings they deposit – a scenario which could lead to Aussies withdrawing their savings to stuff cash under the mattress.  

However, according to the RBA, banks in countries with negative cash rates have not passed these rates on to savings customers, as “it did not make sense either commercially or politically to charge households and smaller businesses for holding their deposits.”

What can you do about the negative rates?

While the RBA has stressed that negative rates are unlikely to be implemented in Australia, it rarely hurts to give yourself a financial health check and consider whether you’d still be in a good position if Australia’s cash rate was slashed to zero or below. Much like the APRA expectations for banks, it could be worth preparing a plan for a negative interest rate future, including comparing financial products that may best suit your changing needs.  

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