Will it be interest-rate cuts forever?

One of the main themes of this blog has been not only the trend towards ever lower official interest-rates but also the fact that this is a trap or as Coldplay put it in the song Trouble.

Oh, no, I see
A spider web, and it’s me in the middle,
So I twist and turn,
Here am I in my little bubble,
Singing out…

Of course the media is full of stories about interest-rate cuts being expansionary for the world’s economies. It is extremly rare for them to be troubled by the thought that we have had so many interest-rate cuts and so little consequent expansion. My argument has been that as you approach zero interest-rates any expansionary effects fade and the contractionary effects -on savers and private-pensioners for example- build such that there may be no expansion at all. In the world of negative interest-rates into which the European Central Bank has dipped a toe (it’s main rate is -0.2%) I can see circumstances where other factors such as psychology and fear can make an interest-rate cut contractionary. As I have observed elsewhere when challenged on this front central bankers resort to long words like counterfactual – never a good sign- and sing along to some other lyrics from the same song.

I never meant to cause you trouble,
And I never meant to do you wrong,
And I, well, if I ever caused you trouble,
Oh, no, I never meant to do you harm.

How is cutting interest-rates a trap?

The main factor is a moral hazard one. If we take a standard example interest-rate cuts are made to help debtors. The catch is that over time they get used to the new lower interest-rates and treat them as normal and start to borrow again as for example we are seeing in the world of unsecured lending in the UK. So my argument depends also on the length of time that interest-rates are kept low. In my own country of the UK Base Rates were cut to 0.5% on the 5th of March 2009 and they are still there, so the time element has occured.

Putting it another way Keynesian economics is based on time getting us to act now rather than later and then heading into a (hopefully) better future. The issue comes when we start to sing along with the group Muse.

Our time is running out

Indeed whilst the Bank of England has regularly hinted and teased about Base Rate rises this year they have not happened suggesting that for our situation Muse have some lyrics too.

I wanted freedom
Bound and restricted
I tried to give you up
But I’m addicted

Sweden goes to zero

This morning the Riksbank of Sweden decided to take the theme of ZIRP (Zero Interest Rate Policy) about as seriously as you can.

The Board is cutting the repo rate by 0.25 percentage points to zero per cent,

There is an element of a shock headline impact of a country going literally to zero as it is relatively rare. Countries like Japan and the United States stopped just short at close to zero. In case you were wondering why the Bank of England for example was afraid of the consequences of zero and indeed negative interest-rates on the creaking and antiquated Information Technology systems of the banks. Central banking priority number one is of course other banks.

A space oddity

Here is something that caught my eye and gave me a wry smile as I thought of my theme of ever lower interest-rates. From the Riksbank.

In Sweden, economic activity is continuing to improve, primarily driven by good growth in household consumption and housing investment……The labour market will continue to strengthen in the years ahead and there will be a clear fall in unemployment.

So a strengthening economy is now grounds for an interest-rate cut?! Well maybe not yet but we can say that on its own it does not prevent one (Bank of England watchers please take note). In other times these would be taken as bullish forecasts.

GDP is expected to grow at a rate of 1.9 per cent this year and 2.7 per cent next year. During 2016 and 2017, GDP will grow by 3.3 and 2.3 per cent respectively.

Okay so what was the reason for the interest-rate cut?

Despite the fact that both GDP and employment have increased at a relatively good rate over the last 12 months, inflation has continued to be lower than expected. The broad downturn in inflation and the repeated downward revisions to the inflation forecast imply that underlying inflationary pressures are very low and lower than previously assessed.

So the Riksbank got its inflation forecasts wrong and it has headed lower. The dip in the price of West Texas Intermediate Crude Oil below US $80 per barrel reminded us of that only yesterday. However even the most fanatical of central bankers do not believe in interest-rate cuts having an immediate effect with the leads and lags for a full effect being in the period 18/24 months ahead. Therefore the low level of inflation now is irrelevant and what we need is it looking ahead. Here we have a catch as by definition it admitted it had been wrong. Ouch! So much for fine-tuning as this move could just as easily impact when inflation iis rising as falling. Putting it another way this looks a rather panicky move to me.

Moving to their own justifcation the fan chart for future inflation in Sweden does have a 90% outlier where it dips to -2% but the central forecast is supposed to rise above zero in 2015 onwards.

What is so bad about zero inflation?

Consumers and indeed workers will welcome it as it will relieve pressure on real wages and incomes. It does not mean that there are no price changes simply that th eups offset the downs. At this point compared to the inflation the Riksbank seems so desperate for it will seem something of a nirvana to the ordinary Swede.

Of course there is this bit.

Household indebtedness is high in both a historical and international perspective. After having remained relatively stable since mid-2010, the figure for debts as a percentage of disposable income has begun to rise again over the last 12 months. Debts are estimated to increase more quickly than incomes over the next few years, which means that the debt ratio will increase.

What could go wrong?

Ahem as Snoopy would say.

which is reflected in rapidly rising housing prices and a rapid increase in consumption in the second quarter.


According to statistics from Valueguard, the annual rate of price increases for tenant-owned apartments and detached houses also continues to increase and in September was at 14.5 and 9.4 per cent respectively.

How will interest-rate cuts help anyway?

The highly-expansionary monetary policy and a gradual recovery abroad is expected to lead to an increase in demand in Sweden in the years immediately ahead. Companies will then be able to raise their prices and pass on cost increases to the consumers to a greater extent, and inflation is thus expected to rise.

A bit vague isn’t it?

Let me help out a bit as the main mover in monetary policy these days is exchange rates leading to fears of 1920s style competitve devaluations. The catch of course is that it is a zero sum game. According to the initial reports from the Financial Times Sweden seems to be seeing this.

Swedish krona hits fresh four-year low

This should provide an upwards push to inflation at the cost of making Swedes poorer. Although for other countries there is an element of Sweden exporting deflationary pressure here and with the Euro area at that game too there is a lot of this about in Europe right now!

What about Norway and Denmark?

The Norges Bank was expected to cut sooner or later and I guess the sooner option may well be on its way. If we look back to the interest-rate rise of late April Denmark’s Nationalbanken can choose whether to wear a clown’s uniform or a dunces cap as it sits this out in the corner.

Oh and just a thought but these countries back in the day were considered part of the sterling group….

What about Quantitative Easing?

There are already suggestions that Sweden should try this. As it already has a ten-year bond yield of 1.22% then if we look at the past arguments of those who are fans of QE it would be virtually pointless. Therefore as we live in a crazy mixed up world it is probaly quite likely!

Aren’t we supposed to be better off?

Here are the latest changes for Sweden from ESA 10 and other changes.

Adjustments made as a result of the changeover and other historical revisions mean, for instance, that Swedish GDP is now a good 5 per cent higher.

Yes we are so much better off we need an interest-rate cut, oh hang on a minute…..

And the beat goes on

From Reuters.

Vietnam will lower the ceiling on dong deposits on terms from one month to less than six months that banks offer to the public to 5.5 percent later this week, from 6 percent now, the central bank said on Tuesday.

The ceiling on dollar deposits by individuals will be lowered to 0.75 percent from 1.0 percent now, the State Bank of Vietnam said in a statement.


There is much to consider here from this move by Sweden. It symbolises many things as it responds to moves by the ECB as official interest-rates move on a path that looks inexorably lower. There is an intriguing sense of timing as we expect tomorrow one part of expansionary monetary policy to end in the United States as the good ship QE3 gets towed to the scrap-yard. But as fast as someone looks for the exit someone else opens the door and I am reminded one more time of the genius of Glenn Frey and Don Henley which I will leave you with today.

Last thing I remember, I was
Running for the door
I had to find the passage back
To the place I was before
“Relax, ” said the night man,
“We are programmed to receive.
You can check-out any time you like,
But you can never leave!


23 thoughts on “Will it be interest-rate cuts forever?

  1. Great article Shaun.
    I would contend that interest rate cuts have been anti-expansionist for some time; how much lower are the payments on tracker mortgages now than they were at 2% bank-rate?
    How much lower credit card rates?
    So the indebted aren’t really getting the relief that low interest rates would suggest, whilst very cheap borrowing for banks means they aren’t chasing deposits to finance the loans they make, so those who live off (at least in part) their savings are being squeezed too.
    Add in 10% cuts to wages, benefits being frozen, and the destruction from QE that annuities have seen, and we’re bound to see disinflationary pressures.
    The 10% cuts to wages is just recent history too.
    I’d argue that there have been real reductions in the value of wages for over 30 years, that there have been disinflationary pressures as a result, but it is only really now that they become obvious.

    For example, working more and more hours per family to make up the difference has helped to mask these pressures, but now demand is so scant that there isn’t the production to justify more hours worked, which ties in with the productivity gaps we’re seeing.

    In my view, we are finally witnessing the abject failure of neo-liberal economics, despite politicians’ best efforts to serve their real masters.

    • I certainly agree that cuts have not had the desired effect and indeed are probably causing the opposite reaction. I know many people like myself who used to enjoy a savings rate that allowed a little discretionary spending once the effects of inflation had been deducted but who now have had to limit that to meet daily needs. If savers outnumber borrowers (as we are frequently told) then this has to have a negative impact on the economy.

    • Totally agree lack of demand (low wages etc) main problem but now misrepresented as supply problem with emphasis on cutting red tape, reducing costs (headcount, wages and benefits) just to make matters worse!

      • it can be seen that the pollies are aware that low wages are a problem – hence they compete with raising the tax threshold whilst beggaring the country


    • no its the first step to theft of your savings ( some would posit thats already happening )

      And has others have pointed out , this is the Bank rate – we the people are paying way above that already

      if they truly put negative rates for everyday bank accounts ( apart from bringing back a charge for having a bank account and general transactions charges like USA ) you see our banks will collapse !


  2. Shaun,
    Are organisations which invested funds for returns (eg insurance premiums) now adapting to ZIRP by offering staged payments and charging extra for the privilege? Another unintended consequence!

    • Hi Chris

      That is a valid point about the insurance industry and I confess I am not an expert on that. The concept that “safe” returns must be lower seems to be clear.

      The area I am clearer about is final salary pensions where lower interest-rates and bond yields helped push the funds into deficit. Then companies had to divert money to fill what were theoretical deficits and thereby substantial sums were sucked out of the economy.

      I am due up to renew my flat contents insurance so I will check the interest-rates on monthly repayments. My understanding is that like credit card rates they have not followed the ZIRP era at all.

  3. Great column, Shaun, as usual. I know this is a little off topic but I noticed that Statistics Sweden stopped calculating their Net Price Index (NPI) starting with the January 2014 update of the Swedish CPI. The Swedish NPI had been calculated from 1965 forward. This series was similar in its calculation to the RPIY, CPIY and CPIHY serries calculated by the ONS. And of course, the ONS also calculates a TPI, one of the less useful innovations of the Thatcher government, although the US Bureau of Labor Statistics liked it well enough to start calculating an American TPI. All of these combined with a CPI-CT series is a little too much of a good thing. It would probably be better if the ONS dropped all of their Y series and the TPI as well. The latter is especially problematic as it is a strange hybrid of CPI and an index of taxes, including income taxes.

    It would seem to me that the UK has more need for an RPI or RPIJ counterpart to the very well-designed CPI-CT than it does for an RPIY series. As you may know, Canada has only one tax-adjusted consumer price series now, the Bank-of-Canada defined CPI excluding changes in indirect taxes. The calculation of the index is somewhat amateurish: property tax changes are incorporated in it, and the base tax rate is updated every month rather than once a year, but the principle of only having an analytical consumer price series that adjusts for changes in indirect taxes is worthy of consideration.

    • Hi Andrew

      You have raised several points here but let me open with one bit which refers to a past discussion. I avoided an explicit mention of Swedish CPI as I recalled our discussion as it is not quite so clear as one might think.

      As to consumer inflation indices that exclude indirect tax changes I can see why a central bank would want to look at that. Frankly all will even those who do not admit it! However the main index should always be what people actually pay.

      Oh and here is a difficult bit of the excluding indirect taxes as you could argue that there are elements of that in the rises in tuition fees for UK universities. Whilst you can too and fro over it being a tax at these levels, it is a government set price so the Y versus CT argument is not all one-way. It is quite a tangled web isn’t it? Although I have just checked the technical manual for RPIY which does not mention tuition fees. After thinking about it my view is that it should.

  4. Hello Shaun,

    Why ?

    Why are we here? I think you;re right , we’ll not see interest rates for a long time

    And expect QE Infinity *TM next year

    yes the lights will not go out in your homes but all those industries with Smart ( ha ha ) meters will , still not to worry , get some candles in !!


    • Hi Forbin

      I saw a section on BBC News 24 on the energy issue looking at a company which can turn off its power for an hour. Sadly they failed to ask what if on a cold night peak power demand is as seems likely longer than that! Also I suspect that some firms will be forced to cut power demand and also output.

      Should we have blackouts my suggestion is that they should start with the homes of our political establishment whose complacency has put us in a vulnerable situation.

  5. Will it be interest rate cuts forever?

    No, but the longer the Depression proper is stalled the worse the Depression will be and the longer it will be before there are significant interest rate rises;

    Because I don’t expect significant IR rises before the Depression has played out proper. In the meantime the rich get richer.

    Will the rich be hoisted by their own petard or by the ‘hangman’?.

  6. Shaun,
    i saw the FT article on Sweden and lopped rates. Our rates are not going up or down before the election, we are on a “course of hold her steady” from Captain Cameron. There is this thorny issue about peoples “real wealth” (their house) falling in value before the election and I expect some knee-jerk measures between now and May to inject a fillip of upwardness to that asset.

    Long-run, of course you are right, we are royally trapped along with the other major economies, as long as we are all in it together then I suppose that is OK?……

    Paul C.

    • Hi Paul C

      I still think that the Bank of England would respond to any slow down with inflation where it is with more easing. It could foil me a little with some more QE but as others cut interest-rates then it gets easier.

      In a way it would be better if we were not all in it together as there would be someones coat tails to try to hang onto.

  7. Hi Shaun,

    Fascinating post as usual. If there are more savers than borrowers and we are a net importer why shouldn’t a modest rate rise benefit the UK economy?

    • Hi Zummerzetman

      I entirely agree especially in the situation we find ourselves. Conventional economic is so trapped in an “interest-rate cuts are good” mindset that it cannot see the wood for the trees in my view.

  8. Look to America. If the growth there is real then we’ll have to move on rates next year, because they will. If the growth is a lie then they’ll defer and so will we, maybe even with more meddling. And the lie will be exposed and perhaps a few more journos will have the balls to point this out. As a personal fiscal anecdotal, I’m seeing reluctant shop spending, quiet pubs, empty cinemas, a wobble in house asking prices, petrol, clothing, toys, comms, alcohol, energy, media and food all under pressure to get cheaper. Husband your pounds. As our leaders destroy the culture and promotion of hard work, caution and savings, I see a chimera of Brit tightfistedness and bluster rising up to push spending down.

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