Borrowing in a Negative Interest Rate Economy

[Brian Lacey]

If the Fed goes to negative interest rates for the overnight borrowing, what does that look like for investors?

The Fed for years was at 0-.25% interest, a loan was in the 3-5%.

Is the logic conclusion mean if the Fed went to -.25-0%, would a loan be in the 2-4% range?

Any thoughts? I know some of the European countries, and now Japan have gone to NIRP. Anyone have any experience from the European side of how its affected RE there?

[Keen C.]

Negative rates have already happened here in Japan, as of yesterday. Immediately apparent was the effect on REIT liquidity prices and the weakening of the yen. Whether or not the negative rates set by the Bank of Japan will trickle down to consumer rates at the individual level is a totally different question.

Banks have the option to decide how much interest they charge the consumer, and they might either lower rates so that consumers will borrow because the bank is essentially being penalized by having money in the bank.... or (even if unlikely one can argue that) the bank might charge higher interest rates to the consumer in order to make up for the penalty of keeping money in the bank since negative rates do not mean bank reserve requirements disappear.  

Taking a step back, there's also the question of the percentage of the consumer loan market vs the percentage of the corporate loan market; e.g. it would probably make more sense for banks to pass the lower rates to businesses (bigger loans, more "rational" decisions, comparatively higher transparency, more collateral, etc) rather than individual consumers.

Would love to hear what other BP'ers think; either way what happens in Japan in the following months will be an interesting one to watch...