Negative Real Interest Rate, Financial Repression in Your Pocket – Chart of the Day

Mixed European banknotes.
  • It is difficult to find reliable data on financial repression and negative real interest rates.
  • In our overview turned out that more than half of the countries introduced it already.
  • In the last 13 months, government bond yields have continued to decline in most countries.
  • So, the negative real interest rate is likely to remain with us in the coming years.

 

 

A Negative Real Interest Rate Means Losses for You

Financial oppression and negative real interest rates – these terms are good for everyone to learn. This already happened in many parts of the world since the 2008-2009 depression. It may even intensify because of the coronavirus crisis. It means people only receive interests and yields below inflation for their savings. So, their savings lose their value. (Many people also question the reliability of official inflation data. Not only believers of conspiracy theories, but also serious economists, based on their calculations.)

Our chart shows, negative real interest rates, financial repression existed before the coronavirus crisis. After searching in vain for reliable real interest rate data, we compiled our own table. There is plenty of data available on interest rates and inflation. But the government offices, central banks don’t calculate all indicators. They don’t calculate how many people lose on their savings. I wonder why? (Or, what they calculate, is sometimes hidden on page 176 of a 200-pages report.)

Repression in 20 of 32 Countries

We compared the most recent year-to-year inflation rates (CPI) of March for many countries, with the one-year government bond yields. Since inflation refers to the past 12 months, we looked for the one-year yield valid a year before.

Don’t Mix the Past with the Future


 

Why are we using the government bond yield of March 2019? Because inflation in March 2020 shows the change in the value of the money from March 2019 to March 2020. That is the past. The one-year interest or yield in March 2020 covers the period from March 2020 to March 2021. That is the future. So, the March 2019 yields had to be chosen as a starting point. It is comparable to the March inflation.

 

The chart shows us that in 20 of the 32 countries analyzed, real interest rates were negative between March 2019 and March 2020. In some European countries, money has lost 2-4 percent of its value. But countries with a high real interest rate are struggling with other serious problems. Mostly with high inflation and high foreign debt. They are also heavily exposed to low commodity prices and their currencies fluctuate sharply. Examples are Russia, Brazil, Turkey, and South Africa.

Real Interest Rates, March 2019-March 2020. (Difference of one-year maturity government bond yields in March 2019 and inflation of March 2020.)

Real Interest Rates, March 2019-March 2020. Click for higher resolution. (Difference of one-year maturity government bond yields in March 2019 and inflation of March 2020.)

Government Bond Yields in Free Fall

Our table also contains one more interesting thing. One-year government bond yields have fallen a lot in many countries over the past 13 months. (To the end of April 2020 from the end of March 2019.) Decreasing in 25 of the 32 countries analyzed. For example, in Brazil, Canada, or Chile, only mentioning countries at the beginning of the table. We don’t know how inflation will change in this crisis. But even if inflation declines moderately, real interest rates in many countries are likely to stay in the negative or near zero in the coming years.

Inflation, Government Bond Yields and Real Interest Rate

CountryDifference (real interest rate), March 2019-March 2020Inflation (CPI) y/y, March 20201y soverign bond yield, March 20191y soverign bond yield, April 202013m yield change
United States0.8871.5392.4260.19-2.236
Austria-2.0631.598-0.465-0.638-0.173
Belgium-1.1340.625-0.509-0.4650.044
Brazil3.2873.3036.593.169-3.421
Canada0.8040.8861.690.321-1.369
Chile-0.5023.7423.240.35-2.89
China-1.8564.2712.4151.112-1.303
Czech Republic-1.7173.4421.725-0.033-1.758
Denmark-0.9790.389-0.59-0.5380.052
France-1.1510.674-0.477-0.495-0.018
Germany-1.9881.439-0.549-0.558-0.009
Great Britain-0.7361.4950.7590.074-0.685
Greece1.554-0.0041.550.338-1.212
Hungary-3.6143.9040.291.090.8
India-0.46.846.443.933-2.507
Indonesia3.6733.0356.7085.578-1.13
Ireland-0.2160.6860.47-0.312-0.782
Israel0.34900.3490.049-0.3
Italy-0.0430.0970.054-0.025-0.079
Japan-0.5440.394-0.15-0.173-0.023
Mexico4.8613.2498.115.284-2.826
Norway0.5380.7251.2630.225-1.038
Poland-3.0974.6061.5090.421-1.088
Portugal-0.3980.047-0.3510.0010.352
Russia5.0542.5467.65.095-2.505
South Africa2.8344.0616.8955.575-1.32
South Korea0.7361.0051.7410.806-0.935
Spain-0.305-0.018-0.323-0.1780.145
Sweden-1.1260.639-0.487-0.2380.249
Switzerland-0.075-0.515-0.59-0.340.25
The Netherlands-1.9111.405-0.506-0.521-0.015
Turkey10.11111.85921.978.315-13.655
Notes: Denmark, South Africa, Sweden: 2y bonds. India: CPI in February. Greece, Netherlands: 6m bonds.

Is There a Defense against Financial Repression?

How to protect us against negative real interest rates? We can buy “real assets”, such as real estate, farmland, precious metals, other raw materials. Company stocks can also result in a good choice in the long run. Most companies can raise their prices with inflation. So, their profits, dividends, and the value of their shares can also increase. We wrote more about inflation protection methods here: Eight Ways How Inflation Threatens Your Income and 13 Ways to Fight It And about financial repression, expected continued negative real interest rates and precious metals here: Are We Facing Epic Inflation, Horrific Real Interest, and Brutal Gold Price Explosion?

Why Is It Difficult to Calculate a Real Interest Rate?


Determining the real interest rate is difficult because there are several variations in many countries. National banks’ leading interest rates are often unrealistic for individuals. For example, they are only valid for banks or other institutional investors. Many countries have double or multiple parallel interest systems. So, different interest rates apply to different economic actors.

For example, the conditions available to the individuals, the banks, and the companies are different. Most individuals don’t pay a negative interest rate or yield. At least they can maintain zero interest on their bank accounts.

 

Please leave a comment if your country is in our table, but you think these numbers aren’t realistic!

(More about financial repression on  Wikipedia)

(Data sources: Global-RatesInvesting.comTradingview.com.)

Disclaimer

I’m not a certified financial advisor nor a certified financial analyst, accountant nor lawyer. The contents on my site and in my posts are for informational and entertainment purposes and reflecting my collection of data, ideas, opinions. Please, make your proper research or consult your advisors before making any investment or financial or legal decisions.

 

(Photos:  Own works,Pixabay.com.)

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