negative rates, negative reactions - ing wb€¦ · savings deposit rates might go negative, our...

ING Economic and Financial Analysis Global economics

Negative rates, negative reactions Survey suggests sub-zero deposit rates might not boost consumer spending

ING Economic and Financial Analysis • Negative rates, negative reactions

2

Negative rates, negative reactions Survey suggests sub-zero deposit rates might not boost consumer spending

The European Central Bank is set to cut official interest rates even further into negative territory. This poses a challenge to banks over whether or not to pass on the cuts to retail customers. We surveyed around 13,000 consumers in Europe, the US and Australia to ask how they might react if rates went negative. A remarkable 77% said that they would take money out of their savings accounts. While a few would spend more, this would be offset by almost as many saving more. Yet most said that they would either switch into riskier investments or hoard cash ‘in a safe place’. Better news, then, for safe makers than for banks and central banks.

Official Policy Rates (%)

Source: Macrobond

ING Economic and Financial Analysis Global economics

ING Economic and Financial Analysis

Mark Cliffe

Head of Global Markets Research

London +44 20 7767 6283

[email protected]

Retail Savings Rates (%)

Source: ECB, SNB


3

Table of contents 1. Testing life below zero

2. Survey highlights

3. Assessment

Appendix: Survey results in detail


4

1. Testing life below zero The European Central Bank (ECB) President Mario Draghi has strongly signalled that the further policy easing is on the cards at the Council meeting on 3 December. Despite opposition, not least from the Bundesbank, the ECB is widely expected to cut its official deposit rate even further from its current -0.2%. With market rates sinking further into negative territory, this poses a challenge to banks over whether or not to pass on the cuts to retail customers, even cutting savings rates below zero.

Fig 1 Most savers say they would move money out of their accounts if rates go negative

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 (IIS)

In Sweden, Denmark and Switzerland, where official rates are even lower, banks have been noticeably reluctant to go below zero on retail rates. A small Swiss bank, Alternative Bank Schweiz (ABS) last week announced that it would do so from the New Year.

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, as part of ING’s International Survey (IIS), we commissioned IPSOS to survey around 13,000 consumers across Europe, and, for comparison purposes, the US and Australia, to ask them how they have responded to low interest rates and how they might react to negative interest rates.

We acknowledge that surveys have drawbacks. There is inevitably a gap between what people say and what they do: inertia often kicks in. Nevertheless, our survey 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’.

In the next section, we discuss the main highlights of the survey. We then conclude with our assessment of the implications.

Our survey of consumers across Europe, the US and Australia asked how they might react to negative rates

Zero is a major psychological barrier for savers: 77% said that they would take money out of their accounts

As in Sweden, Denmark and Switzerland, Eurozone banks will be reluctant to go below zero on retail rates…

…even at the cost of profits, capital generation and willingness to lend


5

2. 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, our IIS survey began by asking respondents about how they have responded so far to low interest rates.

Fig 2 Nearly a third of savers have changed their behaviour due to low rates

Source: ING International Survey (IIS)

We asked whether the low rates had prompted a change in their behaviour and, if so, how. On the first question, on average across the 15 countries surveyed, 31% said that they had changed their savings behaviour (see Figure 2). The figures were generally lower in the core Eurozone countries, with the Netherlands polling the lowest, at 19%. 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 have switched into 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%.

40% have saved the same amount, but have switched into longer term forms of saving, led by the UK

Low rates have prompted 31% to change their savings behaviour


6

Fig 3 How have you changed the way you save?

For country breakdowns, please see Appendix Source: ING International Survey

The next most popular response, at 38%, was those who have been saving less, which is the response most desired by the central banks, who are hoping that low rates will stimulate spending. That said, ‘saving less’ does necessarily translate fully into ‘spending more’, particularly for those households relying on interest income. The ‘saving less’ response was most frequently cited by the Germans, with 52%, and least by the Dutch, with 24%.

That said, combining the results in Figure 3 with those in Figure 2, it is worth noting that if we allow for the fact that a relatively small proportion of Germans had changed their behaviour (26%, see Figure2) the proportion of the total sample who have reduced their saving, at 13% (ie, 52% of 26%), is significantly below that of the Austrians, at 17% (ie, 48% of 36%) or Romanians, also at 17% (50% of 35%).

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.

If we subtract those changing in the direction of higher savings from those who are saving less, we can the net percentage of those who saved less, we can again see the Germans and Austrians out in front, at close to 40% (Figure 4). At the other end the scale, a net 2% of Australians actually saved more, while the Americans, as we have seen, recorded a net balance of zero.

38% have been saving less, with the Germans and Austrians leading the way, and the Dutch trailing

17% of those who have changed their behaviour have actually saved more…

In the US 26% of ‘changers’ added to savings, as many as those who had cut them

A net 40% of German and Austrian changers saved less


7

Fig 4 Germans and Austrians lead the way in saving less

Net percentage of those who have saved less, rather than more due to lower interest rates

Source: ING International Survey

2) Response to a possible move to negative savings rates

Having established savers’ responses to low interest rates, the survey then asked how they might react if rates went negative. Although, as previously noted, 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. To begin with, only 23% of the total sample said that they would do nothing in response (see Figure 7). This compares with 69% of the sample who say 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 strong response to a possible move to negative interest rates will not be a surprise to behavioural economists. This is an application of the concept of ‘loss regret’. Experiments have shown that people feel pain of losses twice as strongly as they feel the pleasure of a gain of similar magnitude. Thus feelings evoked by seeing interest rates cut from, say, zero to -0.5% are stronger than those from 1% to 0.5%, even though the monetary change is the same. 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 dimensions to the move to negative interest rates. Many will see it as an unfair ‘tax’ on small savers, particularly in cultures that celebrate saving as a virtue. In this respect, even in an environment of a shift to negative rates it is noticeable that a significant minority of 11% would save more (Figure 5) (this is similar to the proportion of the total sample who have saved more in response to low rates so far).

The strength of feeling revealed about negative rates is striking…

…only 23% would not react

This is an application of the concept of ‘loss regret’…

Many will see it as an unfair ‘tax’ on small savers, particularly in cultures that celebrate saving as a virtue


8

Fig 5 Nearly 80% of savers would respond to negative interest rates

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

In Figure 6 we focus only on those who plan to move at least some of their money out of savings accounts (some 78% of the respondents), and show how they said they would respond. 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 (such as the stock market) 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%. Again, there is room to doubt how far people would do this, since storing cash is not costless (safe makers would enjoy booming sales), but the depth of feeling is clear.

Fig 6 Switching into investments and hoarding cash are the most popular options

As respondents were allowed to choose more than one answer, the country total may exceed 100% Source: ING International Survey

10% would spend more, nearly the same as those who intend to save more…

…the rest either switching to alternative investments…

…or hoarding cash!

…although there is room to doubt this


9

3. Assessment Our survey of consumers’ reactions to the possibility of negative interest rates on their savings will make 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 of the total sample say that they would take some of their money out and hoard it.

Fig 7 Retail deposit rates in Belgium, Sweden, Denmark and Switzerland are still positive (%)

Source: ECB, SNB

We suspect that the strength of the responses partly 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 our survey suggests.

Nevertheless, the 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 outflow1. 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 customer resistance, and the central banks would frown upon higher loan costs, since that would undermine their efforts to stimulate the economy through official rate cuts.

Since the intention of central banks in cutting interest rates further into negative territory is to stimulate the economy, such problems for the banks are also problematic for them. If the banks fail to pass on the rate reductions, either to savers, because of saver resistance to the possibility, or to borrowers, because of the banks’ efforts to defend their margins, then the stimulus will be muted.

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

1 Banks in Belgium will not have this choice. The Ministry of Finance decided earlier this year that interest rates on regulated savings cannot fall below 0% (the minimum is 0.01% base rate + 0.10% fidelity premium for money staying at least a year on a savings deposit).

The survey is sobering reading for both banks and central banks…

…although the reaction might in practice be milder than our survey suggests

Banks might face a tough choice between a profit margin squeeze and a big deposit outflow

Problems for the banks would also complicate central bank efforts to stimulate the economy

Even if the banks pass on negative rates to savers, the spending boost may be less than the rate cuts so far


10

total sample, marginally more (11% vs 10%) of respondents said that they would save more, not less, in the event of negative rates.

Fig 8 Reaction to negative rates also depends on income


One important caveat to this is suggested by the disaggregated results of the survey. Our survey also asks respondents for their income level, age and educational attainment. Disaggregating the results on these dimensions reveals that richer, older and more educated respondents would be more inclined to spend than other respondents in the event of negative rates (Figure 8 shows the response by income groups). Although we do not have details of the savings levels of the respondents, we know from other sources that these characteristics are associated with higher savings levels. As a result, more spending by these groups 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 the zero bound are likely to have a smaller effect on consumer spending than cuts in rates above it. This begs the question of why central banks should consider cutting interest rates deeper into negative territory. In part, this is because they hope to provide a further boost to asset prices by prompting further falls in market rates and bond yields. Such a response is far from certain, and the effectiveness of higher asset prices in stimulating real spending doubtful2. So the main way they expect further rate cuts to work is by depressing the exchange rate, as investors seek higher interest rates elsewhere.

This is particularly pertinent to the ECB this week: it is increasingly clear that weakness in the euro is crucial to its efforts to boost growth and lift inflation. But since ‘competitive devaluations’ risk retaliation from other central banks, the ECB is understandably reluctant to admit this. Indeed, the response to the ECB moving to lower rates further will depend on other central banks not following suit with rate cuts of their own. The ECB, in gearing up for another rate cut, is therefore lucky that the Federal Reserve is gearing up for a rate rise on 16 December.

2 In principle, higher asset prices may prompt higher spending by boosting consumers’ wealth. However, this will be offset by reduced interest income and the adverse impact of lower bond yields on the solvency of pension funds and insurance companies.

One caveat is that richer, older and more educated respondents would be more inclined to spend…

…which points to a bigger boost

Nevertheless, the ECB will be hoping that more rate cuts keep down the exchange rate…

…it is therefore lucky that the Fed is set to raise rates


11

Appendix: Survey results in detail Fig 9 Because interest rates are very low, I have changed the way I save

Total US UK AU AS BE FR DE IT LU NL ES CZ PO RO TU

Yes 30.7 30.3 37.1 23.1 35.6 28.8 23.1 25.6 22.7 29.0 19.4 25.7 24.9 38.0 34.5 47.4

No 69.3 69.7 62.9 76.9 64.4 71.2 76.9 74.4 77.3 71.0 80.6 74.3 75.1 62.0 65.5 52.6


Fig 10 How have you changed the way you save?


I save less 37.7 26.2 27.2 22.6 48.8 27.8 39.7 51.7 35.4 41.7 24.0 41.5 24.0 41.0 50.0 41.5

I save the same amount, but have switched to longer-term forms of saving

40.0 44.9 49.1 42.2 28.4 46.7 32.2 29.3 48.0 31.9 40.1 38.8 44.4 39.1 32.5 38.8

I save more 16.6 26.1 14.5 24.6 10.6 15.9 24.4 10.6 13.1 13.5 4.6 15.9 20.6 13.4 15.1 15.9

Other (please specify) 5.8 2.8 9.2 10.6 12.2 9.6 3.7 8.4 3.5 12.8 31.3 3.7 11.0 6.5 2.3 3.7

Total 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

Source ING International Survey

Fig 11 What would you do if the interest rate(s) on savings account(s) fell below 0% for example to -0.5% so that you would receive less money in the future than you originally saved?


I would start spending more of my savings than normally

9.9 10.3 11.2 10.3 13.7 7.6 8.8 12.0 8.7 11.1 10.5 6.1 5.9 8.4 9.8 12.1

I would move some of my savings to alternative investments (eg, stock market)

18.6 23.1 20.4 23.1 17.1 15.6 10.6 17.8 21.2 21.2 17.0 19.7 20.9 12.2 17.3 27.2

I would move most of my savings to alternative investments (eg, stock market)

14.6 18.4 16.7 18.4 16.7 12.6 12.7 16.2 12.4 18.1 9.6 16.0 23.3 11.4 14.2 15.4

I would withdraw a significant amount of my savings and put it in a safe place

33.3 20.6 20.9 20.6 43.5 39.8 39.0 34.0 29.9 38.5 47.5 35.8 32.7 50.4 32.4 24.5

I would have to save more to meet my savings goals

10.9 14.1 10.6 14.1 6.0 7.5 9.5 7.3 14.5 6.0 3.3 10.0 4.0 8.0 13.2 19.0

I would not do anything 22.5 26.6 30.8 26.6 17.0 22.4 26.3 23.5 22.3 16.0 22.1 22.3 20.2 16.0 19.8 16.0

Total 109.7 113.1 110.6 113.1 113.9 105.5 107.0 110.8 109.1 110.9 109.9 109.9 107.1 106.5 106.8 114.1

As respondents were allowed to choose more than one answer, the country total may exceed 100%. Source: ING International Survey

Country codes for Figures Fig 9, Fig 10 and Fig 11: AU Australia, AS Austria, BE Belgium, FR France, DE Germany, IT Italy, LU Luxembourg, NL The Netherlands, ES Spain, CZ Czech Republic, PO Poland, RO Romania, TU Turkey


12

Disclaimer

This publication has been prepared by ING solely for information purposes. It is not intended as advice or an offer or solicitation to purchase or sell any financial instrument or to take any other particular action. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. The information contained herein is subject to change without notice. Neither ING nor employees of the bank can be held liable for any inaccuracies in the content of this publication or for information offered on or via the sites. Authors rights and data protection rights apply to this publication. Nothing in this publication may be reproduced, distributed or published without explicit mention of ING as the source of this information. The user of this information is obliged to abide by ING’s instructions relating to the use of this information. The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions. Dutch law applies. ING Bank N.V. is incorporated with limited liability in the Netherlands and is authorised by the Dutch Central Bank.

Copyright and database rights protection exist in this publication. All rights are reserved.

The final text was completed on 2 December 2015.

negative rates, negative reactions - ing wb€¦ · savings deposit rates might go negative, our...

Documents