Now that the negative interest rate genie is out of the bottle, the one thing banks and governments are watching with extreme focus is what people will do in response to the fact that the money they have in accounts will be worth less, or taken in fees due to the lowered rates.
And we may already have the answer to this as a new survey taken in several different countries shows that on average 80% of the people will take their money out of the banks if negative rates are implemented, leaving them to hold wealth in cash or in another store of wealth like gold.
In an attempt to fill this gap, ING commissioned IPSOS to survey around 13,000 consumers across Europe and – for comparison purposes – in the US and Australia to ask them how they have responded to low interest rates and how they might react to negative interest rates (ING 2016).
The survey then asked how they might react if rates went negative. Although 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. Only 23% of the total sample said that they would do nothing in response (see Figure 3). This compares with 69% of the sample who said 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 negative reaction to the possibility of negative interest rates is an interesting application of the behavioural economics concept of ‘loss regret’. Feelings evoked by seeing interest rates cut from, say, zero to -0.5% are stronger than those from 1% to 0.5%. 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 dimension. Many will see negative rates as an unfair ‘tax’ on small savers, particularly in cultures that celebrate saving as a virtue. In this respect, a significant minority of 11% would save more (Figure 3). Nearly 80% of savers would respond to negative interest rates.