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Chrisman's Corner: Global Interest Rates Impact Our Mortgage Rates

JMAC brokers know that, generally speaking, expanding economies cause interest rates to move higher and slowing economies push them lower. In response to slow economic growth, some central banks have decided that, instead of paying banks interest on excess reserves parked overnight at the central banks, it will charge them interest. Presumably, they assume that banks would thus be motivated to lend money rather than pay the central banks to warehouse it. What does that mean for our clients?

 We’ve recently seen the Central banks of Japan, the EU, Denmark, Sweden and Switzerland set negative rates on reserve deposits. These are not passed along to depositors. In effect, a bank with excess reserves has three choices: make a loan, lend the money to another bank, or pay the "tax" associated with doing nothing with the money.

There are other negative rates. Why do banks pay other banks to take money off their hands? The alternative is to pay even higher rates to, for example, the ECB for the privilege of holding onto their excess reserves. ECB charges 0.3% annual interest on excess reserves.

Negative rates also exist in government debt: $7 trillion in sovereign debt has negative interest rates. People pay the governments to hold their money. The message is, "You want to make a risk free loan? Fine. You pay us to hang onto your money." And Japanese investors are so desperate to move their money out of their country that they're paying big premiums to borrow U.S. dollars.

 Here in the U.S., mortgage rates are more stable. These loans to individuals will always carry a higher rate than government debt issued by the United States since individuals are viewed as riskier than our government. With the underlying risk that prompted lending money rather than have it lost to the taxation of negative rates, banks will loosen their lending standards and incur losses. JMAC’s management will watch what happens overseas but continue to make prudent lending decisions and help our brokers do the same.