Today I wish to examine the concept of negativity but not in the way that it is normally meant! Specifically I wish to look at it in the land of economics with specific reference to negative interest-rates which are an increasing feature of the landscape. This has long been a theme of this blog which has been on this particular case for some years now. I recall telling a UK think-tank (that phrase is now in my financial lexicon) back in the autumn of 2010 that negative interest-rates were a genuine danger and returned to the subject regularly including on the 11th of October 2012.
This has given us a situation where some have to pay ever higher interest rates on borrowing but others may find themselves receiving negative interest rates on their savings. So they may save 100 and get back 99 in a year’s time.
What had brought the subject up back then was this situation.
If we look at official interest-rates then we have seen examples of this develop in 2012. For example in Switzerland the two-year government bond yield first went negative back in early April and is -0.16% today. German yields have also gone negative at times although right now the only one actually negative is her three month one. Back in July the Danish central bank found itself issuing some of its certificates of deposits or CDs at an interest rate of -0.2%.
That is a familiar list of candidates as we shall see in a moment! But the issue is a growing one as we mull how much contagion there will be. Also back then I quoted from the Financial Times on the 23rd of August of that year.
Bank executives, as well as central bankers, are clear that lenders have to increase their loan prices to compensate for the loss, as they are unable to impose negative rates on customers.
So rather than the economic stimulus claimed in fact negative interest-rates may well turn out to be a contractionary influence. Those with debt may wonder at another Alice In Wonderland feature of the credit crunch era where less (lower official interest-rates) is more (higher borrowing rates for the rest of us). The subject went on.
Ah yes, so lower interest-rates officially mean higher ones for borrowers do they? Let me tuck that into my financial lexicon. Indeed Thomas Kressin of PIMCO (the world’s largest bond fund) described such thoughts like this.
It is almost quantum physics
Why is this on your mind today Shaun?
This is a subject which was exacerbated by the behaviour of the Swiss National Bank only last Thursday as in addition to abandoning the Swiss Franc cap at 1.20 to the Euro it announced this.
At the same time, it is lowering the interest rate on sight deposit account balances that exceed a given exemption threshold by 0.5 percentage points, to −0.75%.
In terms of official interest-rates this was a move which broke new ground for a major economy and is the current leader of the pack. This was then followed by extraordinary developments in the Swiss Bond market where negative yields spread their way as fast as a bacterial infection along the maturity spectrum. It still seems extraordinary for a ten-year bond yield to be negative but according to Bloomberg the Swiss ten-year currently yields -0.08%. Just to be absolutely clear rather than them paying you interest the investor pays them. If we think of this on a stand-alone basis this rather destroys the point of a bond does it not?
I did say that there would be a familiar list of names! Pressure was placed on Denmark and the peg that it has to the Euro by the Swiss announcement. This was only exacerbated by the official denials which of course reminded us one more time of this from Jim Hacker in Yes Minister
Never believe anything until it is officially denied.
We did not have to wait long for the denials to turn to action as yesterday the Danish Central Bank announced this.
Effective from 20 January 2015, Danmarks Nationalbank’s lending rate and interest rate on certificates of deposit are reduced by 0.15 percentage point. The discount rate and the current account rate are unchanged.
The Danish central bank has done something of a hokey-cokey dance with negative interest-rates but they are drawing it into their web with ever more force.
Certificate of deposit rate: -0.20 per cent
I guess that they are awaiting Thursday and the policy announcement by the ECB with extreme nervousness. Although of course the official view is that there is nothing to worry about. From Bloomberg.
“Circumstances significantly different from Denmark’s” were behind the Swiss National Bank’s decision, Danish Economy Minister Morten Oestergaard said in a phone interview. “Any comparison between Denmark and Switzerland is impossible.”
Actually the road to Thursday lunchtime may yet be a very long one for the Danish central bank as we wonder at what point the ECB will let it know what it plans to do next. I wish them good luck as on many of the roads forwards they will certainly need it.
Earlier this morning I spotted that negative yields were biting ever tighter in the bond or bund market of Germany. The two year yield dropped to -0.16% which is the lowest I have seen it. Added to this was the symbolism of the coupon on today’s five-year Bobl (bond) issue. From Twitter.
@BrendaKelly_IG GERMANY SETS COUPON ON NEW FIVE-YEAR NOTES AT ZERO
There will be no direct impact on your savings. Only banks that deposit money in certain accounts at the ECB have to pay. Commercial banks may of course choose to lower interest rates for savers.
If we jump back into the TARDIS of Dr.Who then I would like to pose again a question I first asked on the 2nd of September 2011.
As policy makers in the UK and US talk of more easing their minds may begin to focus on negative interest rates. Will they try to enforce them?
Circumstances have changed in that both the UK and US had good 2014’s in terms of official economic growth and the official story is one of proposed interest-rate rises. But of course the ECB actually raised interest-rates twice in 2011 and look where it finds itself now.
One factor that has changed is that we have seen some banks offer negative interest-rates for savings which contradicts some of the thoughts from 2,3 and 4 years ago. But that is in itself a contractionary influence. Also if we factor in the negative rates of annual inflation being seen in ever more places we are left wondering if negative interest-rates should be included in my definition of deflation and how it can be measured.
As I have being discussing interest-rates and there is much to say I have stuck to nominal ones but there is another post waiting on the subject of real interest-rates right now where we also add in inflation. In terms of existing inflation it is plainly negative right now in much of the western word but of course real interest-rates depend on expectations of inflation just as the future is as uncertain as it has ever been.
Also the flow of interest-rates is combined in a mix with expected or hoped for gains -sometimes just the avoidance of expected losses – from a currency for foreign investors as we add another factor to the mixture. Stay tuned though because I expect this saga to run and run.
During the time I have been writing this blog and pursuing the Notayesmanseconomics project my biggest supporter has been my father Kenneth Richards. Sadly he died earlier this morning as the complications of the lung cancer he was suffering from increasingly inflicted themselves on him. If he was still here now he would insist on me carrying on which I intend to do except for the day of his funeral. He would not be surprised either that some lyrics come to my mind. From John Winston Lennon and the Beatles.
There are places I remember
All my life though some have changed
Some forever not for better
Some have gone and some remain
All these places have their moments
With lovers and friends I still can recall
Some are dead and some are living
In my life I’ve loved them all