How Negative Interest Rates Sap Consumer Spending by an Ever Larger Part of Consumers

Over-65s, a large and growing demographic in Europe, are cutting their spending at worst possible time as NIRP eats into savings, pensions, investments, and annuities.

With the coronavirus crisis upending the global economy, leaving all manner of mayhem in its wake, many of the economic trends that predate the pandemic’s arrival continue apace. Some are accelerating. They include the erosive impact zero and negative interest rates have on savings, investments, annuities, and pensions of European retirees, of which there are an ever larger number, given the aging populations. This has been decimating their spending power, which in turn saps consumer demand, and thereby the broader economy.

Over-65s are a large demographic, representing around 20% of the entire EU-27 population. And it keeps growing. By 2030, people over the age of 65 could represent as much as 30% of the population of Spain. Even in Ireland, one of the EU Member States with the youngest populations, the share of the population aged 65 and over is forecast to increase from one in eight to one in six by 2030.

As the population ages, the financial pressures grow. Two weeks ago, the privately owned Bank of Ireland — not to be confused with the Central Bank of Ireland — announced that it is going to start charging negative interest, of 0.65%, on cash in accounts held by investment and pension trustee firms. The bank said it had written to 14 investment and pension trustee firms to inform them about the new negative interest rate.

“The average amount held on deposit by investment and pension trustee firms is in excess of €100 million,” the bank said. “Therefore it is no longer sustainable for the bank to continue with the current rate of interest.”

Bank of Ireland is the first Irish bank to take this step. But as has happened in other Eurozone countries, once the precedent is set, it won’t be long before other Irish banks follow suit.

In Germany, annuity-type life insurance policies (Lebensversicherung) that serve as a common part of private retirement planning have also felt the sharp end of the ECB’s negative interest rate policy (NIRP), which was first launched in 2014. The policies pay out a certain amount per month in retirement. Asset managers invest the premiums in government and corporate bonds, which represent around 85% of their portfolios.

This approach worked as long as bond yields remained above the rates of return promised to policyholders. In the 1990s, life insurers offered customers returns of up to 4% per year and still managed to turn a healthy profit. But those days are over…

Continue reading the article on Wolf Street

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