The spectre of Negative interest-Rates haunts this economic recovery

Today I wish to look at th recent developments on one of themes of this blog which is the spread of negative interest-rates. In a way we were reminded of it last week when we in the UK were told exactly the reverse by Kristin Forbes of the Bank of England.

the next move in UK interest rates will be up and that it will occur sooner rather than later.

As we remind ourselves of a version of the “Never believe anything until it is officially denied” mantra I have to confess to a little surprise that Kristin Forbes said this. So far she has looked much the more intelligent of the two women appointed to the MPC (Monetary Policy Committee) in recent times but she is joining the “Forward Guidance” promises which have been an embarrassment for Governor Carney as deadlines pass and pass and sooner becomes much later. After all if she wants an interest-rate rise she can vote for it if she chooses. It does,however reinforce my critique that recent Bank of England appointments can be described in Twitter terms as #CarneysCronies.

Today’s developments

One side of the economic issues which are nudging the negative interest-rate world is the slow down in China about which we learnt more today. From Reuters.

The world’s second-largest economy grew 6.9 percent between July and September from a year ago, the National Bureau of Statistics said,

So below 7% now and slowing which was reinforced by industrial production growth dipping to 5.7% in September although retail sales growth did better. This was not as bad as some expected but rather than being an engine of growth China is stuttering a bit which of course is a factor in world trade growth fading. We can express this via the shipping indices such as the Baltic Dry and Harpex. The Baltic Dry Index has been falling recently and ended last week at 754 which is a lot lower than the 978 of this time in 2014. The Harpex index had been optimistic rising to a high of 648 in the summer but since then has fallen quickly to 448 as of the last reading on the tenth of this month.

The United States will raise interest-rates

This is something which is all over the media and if you missed that then someone will be along soon to promise it from the US Federal Reserve! However if we move from promises to reality something rather curious for those following the MSM mantra happened recently. From the Wall Street Journal.

the U.S. government has auctioned off a string of short-term debt at a yield of zero lately

That is really odd is it not when an interest-rate rise is just around the corner? Well look what happened next.

Yields on bills maturing in a few weeks have been trading in the negative territory lately, but they were only a couple of basis points below zero.

That is mealy-mouthed from the WSJ almost as if it is trying to hold the concept at a distance like it is something unpleasant! US bill yields have been negative before in the credit crunch but when an interest-rate rise is apparently just around the corner?

As to actual issuance at a negative yield the US Treasury is not allowed to do that for now but of course we have seen many such changes in the past few years.

Oh and according to the WSJ then State Street Corp bank has begun charging institutional investors to hold large cash deposits.


There have been negative interest-rates and yields in the Euro area for a while now with the ECB having an official headline rate of -0.2%. Well here there seems to have been a shift and thanks to Martin Enlund.

i tend to agree with his bananas theme as we saw strong car registration numbers last week in the Euro area for example. But the shift downwards in the curve would imply that there is a solid chance of -0.2% becoming -0.3%. Of course then we have something else which is bananas which is the idea that a 0.1% interest-rate cuts would have any significant economic effect. But as you can see it is not only US money markets which have a taste for the negative right now. For those unfamiliar with Eonia it is the Euro overnight rate(s).

Remember also that the Euro area is one where negative yields have proliferated. Many countries have negative yields out to the two-year maturity and the German one at -0.27% exceeds the ECB deposit rate. There was a time not so long ago when this was considered to be “unpossible”. Indeed the German 5 year yield is at -0.03% which fits oddly with the theme of economic recovery and improvement in both the Euro area and Germany. Somehow a flight to perceived safety continues to trump perceptions of the world economic recovery.

Negative deposit and savings rates in Switzerland

These arrived drip by drip for institutional money as countries moved into the negative zone but there has been a much more delayed move for the ordinary person leading to claims by some that it would not happen. From SRF in Switzerland via helpful but clumsy Google Translate and the emphasis is mine.

A first bank in Switzerland soon leads negative interest rates for small customers: From the first of January, customers of the Alternative Bank Switzerland ABS will not only get no interest, they have to pay even itself 0.125 percent interest that they may give their money to the ABS. The negative interest rates are valid from the first franc on the ordinary account for private payments. That is new. (h/t @acemaxx )

Now ABS is a small bank (33,000) and is offering different products which offering a positive interest-rate but they are not the same as cash/savings which can be immediately accessed. If you were of the view that Swiss banking is a cartel you might think that it is being used as a litmus test to see what happens next.

The most recommended comment tells us this.

This is just the beginning, if the economy continues to cool down in the EU area? Then Draghi must expand its QE program or also introduce negative interest rates, which can then be the SNB still do to weaken the franc? Try to further tighten the interest rate screw.

I assume he/she means negative interest-rates for the ordinary depositor too as the ECB has already a -0.2% rate. Although as Will Hutton demonstrated in the Guardian just over a week ago the fact that negative interest-rates can be found in quite a few places seems to get forgotten.

It needs new smart monetary policies that allow negative interest rates.

Odd from someone who is such a fan and supported of the Euro concept which has had negative interest-rates and especially yields for quite some time.


The official story is one of economic recovery and promises of interest-rate rises in both the US and UK. Yet even in the UK Andy Haldane of the Bank of England suggested this just over a month ago.

Negative interest rates on currency

We see also that in money markets in the US there are negative interest-rates and they seem to be speading. So we have a very different form of recovery and economic policy as we see that the promised interest-rate rises have not materialised and people wonder when the next downturn will be. It is also true that there are safe haven issues but why do people want a safe haven in a recovery?

In a way we may be back to the banks who have a business model which does not work at low and especially not negative interest-rates. Please do not misunderstand me bank directors have done extremely well out of the capital gains from bond holdings and so on. They have been able to present in effect capital gains at a time when the underlying model loses its gains from positive interest-rates. In some areas they are able overcharge and make profits but in general the model is not good here. So they need another cheap hit of capital gains from negative interest-rates but the junkie culture then faces a cold turkey of an even weaker business model especially if depositors depart the scene.

Therefore we should all cross our fingers and just like Carly Rae Jepson “really really really really really really” hope that the current economic expansion continues.


30 thoughts on “The spectre of Negative interest-Rates haunts this economic recovery

  1. Hi Shaun
    The crux of the matter is that the only way for TPTB
    to keep control and delay the inevitable bust, is to go down the
    NIR route.
    Chinese growth figures are almost certainly on the
    high side as are our own new car sales with much more self
    registration by manufacturers and their agents.In addition
    unviable lease or PCP deals are only “Moving the metal” a
    few years down the road, along with property prices they are
    just simply to high.
    Mish has been following the likelihood of a fed
    rise and came up with these statistics.

    I understand the reasons for TPTB wanting the continuance of
    the feelgood factor but if they get away with it I’ll eat Paddy
    Ashdowns hat!


  2. Great piece Shaun.
    I think we sometimes lose sight of what negative interest rates actually signify, and that is that the only reasonably safe places to lend money to, can charge for that privilege!!

    It’s not just that these interest rates can be set by institutions, but that they are accepted by lenders!

    It means that the whole financial system is trashed, wrecked, u/s.

    “Zombie banks.” has become, “Zombie capitalism.”

    • Hi therrawbuzzin

      Yes the other side of the coin of investors and depositors being willing to outright pay for perceived security is the implied view of the rest of the financial system. That is quite a change from pre credit crunch when UK local councils were also caught by the high returns offered by Icelandic banks. From greed to fear…

  3. Hi Shaun

    The fact that we seem to be edging down the NIRP route just demonstrates the utter bankruptcy of the current monetary policy.

    We have a world where seven years of ZIRP and QE have delivered at best an anaemic recovery and a world much more vulnerable because of considerably elevated debt levels. These facts are beyond dispute and you would have thought that TPTB would have stopped for a moment to reflect on this before doubling down on failed policies, but it would appear not. There is an implicit assumption that IR relationships are linear but this has to be highly questionable; as Keynes said: at the ZLB monetary policy is pushing on a string.

    I can’t help thinking that if NIRP does drift down to the retail level the people are going to be seriously angry about this. After all could this be done without banning cash? And if we ban cash where do our civil liberties stand; effectively it is theft. by another name.

    Furthermore the collateral effects of NIRP on pension funds and insurance would be dire, as ZIRP already is. People may be delighted that their mortgage is costing very little; they won’t be at all happy when they realise what their pension savings will buy or that their insurance is going through the roof. And those who content themselves with being in a final salary scheme should ponder that the current deficit on FS schemes is in the region of £1 Trillion and can only go higher with NIRP leading to the possibility of default.

    I wonder whether NIRP will ever realistically get beyond academic discussion because to me it not practical politics or, for that matter, economics.

    • Great post Bob.

      There’s a moral and intellectual bankruptcy that underpins the ‘doubling down on failed policies’.

      ‘There is an implicit assumption that IR relationships are linear’….exactly.They assume velocity is a constant however so much they print.Clearly not looked at their own charts.

    • Bob J.
      People’s mortgages aren’t costing very little, they are costing as much as they can afford.
      Trouble is, the pensions and savings of everyone else are being trashed so that can afford them.

  4. It’s taken a long, long time, but a thought has finally struck me on a related matter, and that matter is credit interest rates for savers.

    It appears, prima facie, with interest rates so low, that banks, etc. are not interest in the deposits of savers, but there is another possibility.

    I have posted previously that, although I do not need credit, I am getting it pushed at me, and indeed, can actually make money by re-investing that credit.

    Could this be because of the new(ish) reserves rules?

    If banks lend at ridiculously low rates to savers, are they thinking that people will spend on credit and retain their savings? They may lose a little on that particular loan, but, for every £7000 they retain in savings by lending £7000, they can lend another £93000!
    Presumably this would be at better return rates.

    Even better, if someone they lend that £7000 to re-invests with that bank, ANOTHER £100k can be lent!

    • ‘If banks lend at ridiculously low rates to savers, are they thinking that people will spend on credit and retain their savings? ‘

      That underpins the notion of fractional reserve lending but in reality,with institutions spread across regional and national boundaries,the apples can fall far from the tree.

      As yet we’ve not really had the proper chain of default that we should have had back in 2007/8,not just in the UK but across the world.The taxpayers stepped in and did their bit for the Bankers Benevolent Fund.

      To my mind,that day of default has just been delayed and now the prospect of a broader worldwide reset has increased.At some point China-most likely-will blink and the Western CBers will be peeing into the wind.

      My only advice to Carney and his cronies is
      ‘don’t eat yellow snow…..even if it looks like popcorn’.

  5. There’s a faint whiff of Smoke On The Water about the banking situation in Switzerland. I wonder if indeed “Swiss time is running out”, the question is going to be when. Also, how will the NIRP play out with the folk next door? I think it’s harder to tell if Funky Claude (Juncker) will be “running in and out” but I would imagine he’s not best impressed by the fireworks going off and upsetting the neighbourhood.

    • Hi Andy Z

      I wish I had thought of Smoke On The Water as I wrote this. I am sure I could have used it! I did think of your -3% return pension illustration and should have found a way to put it in. After all it is yet another arena moving into a type of twilight zone.

  6. The logic of Western CBers beggars belief.

    ZIRP hasn’t worked,so let’s NIRP……..and how low will they go before someone realises it won’t work?I dread to think.

    In the meantime,the geo political situation is setting up nicely for a large scale denouement when one of the big countries defaults and causes the dominoes to fall.

    There has never been a moment in modern history that needed real political leaders with real economic understanding and there has never been a moment in modern history when they’ve appeared so gutless, witless and utterly inept.

    I look at the current crop and their vested interests in Westminster and I feel sorry for the young kids in school and the mess they will inherit.

    Issues that have been largely ignored
    1) Credit bubble and over leveraged banks
    2) Failure of monetary policy-ZIRP/NIRP/QE
    3) Looming pensions problems because of 2
    4) Looming demographic timebomb
    5) complete failure to accurately measure economic output/inflation/activity accurately,enabling realistic assessment of problems.
    6) …..I gotta go shopping

  7. Shaun,

    One last thing.Have you ever thought about setting up a forum so we can revisit and discuss posts on a continual basis?

    I’d be more than happy to contribute to it’s funding.Just an idea as sometimes I see topics in the press that reiterate concerns raised here and it’d be nice to revisit and collect the pooled knowledge of you and your readership.

    I realize it can be a lot of hassle etc.

    • Hi Dutch

      I will reply to both here. Firstly it is little step after little step and they find that they have travelled a long way in the wrong direction. When the can landed it was supposed to be in a brighter future.

      As to your forum idea can you flesh that out some more please? I do add things and was considering a Negative Interest Rates category earlier so that the writing and the replies had a thematic greeting.So I was thinking not entirely dissimilarly

      Last week I moved onto posting from here onto Tumblr although I have to confess I know very little about it. But to learn sometimes you have simply to press ahead and give it a go….

      • “But to learn sometimes you have simply to press ahead and give it a go….” That’s what the Pollies and CBer’s would say to any criticism of their actions, so maybe you have some things in common with them?

  8. Hello Shaun

    Sorry but

    … bank directors have done extremely well out of the capital gains…
    …the underlying model loses its gains from positive interest-rates.
    …. they are able overcharge and make profits but …
    they need another cheap hit of capital gains from negative interest-rates …

    the first question came to mind was – then what ? they get this boost and ??

    then, they need negative rates to make more profits? or is that any profits?

    how far into MIRP territory do we need to go before the wheels fall off?

    I have often said the biggest danger to the Banks and the economy is high street negative
    rates – first on savings ( effectively we have them but then again is that why inflation needs to
    be higher ? to push us to spend every last penny ? then what? )

    then on current accounts

    Wasn’t that Charlie Bean’s idea – go out and spend to save the economy?

    capital controls will be needed or the enforcement of electronic money only ( ah the Banks!!)

    its the realization we’re in the trap and the door is closing …..


    • Hi Forbin

      What I was trying to say was that the lower official interest-rates and QE boosted banks books which you can consider to be a capital gain. The main beneficiaries of this have been bank directors who without ever more bailouts would have seen the order of the boot. But they have been able to spin a yarn that things are getting better when most of it is a one-off. In the worst case scenario for them they depart with a few extra years money and a pay-off.

      The shareholder meanwhile faces a business model that looks rather poor going forwards unless there are more one-off or capital gains from NIRP. The taxpayer may yet be paying out again…

      As to Charlie Bean yes it was and I was pleased he was publicising one of my suggestions to his review the other day. We need better services data. Actually I was pleased on two counts as at the Royal Statistical Society he gave a few hints of going through the motions.

  9. Shaun, slightly off piste but wondering if you have any idea why Sterling is kicking around at only 87% of its trade weighted value? There’s lots of positive Sterling views expressed by traders but it doesn’t appear to translate into a rise.

    Currently having a holiday in the Algarve (not the sunny Algarve as it’s lousy weather!) and watching the local politics develop and talking to folk who live here and locals. They reckon the slight improvement in the economy is entirely the result of more Brits spending here and not any real indigenous improvement. We have discussed this before but when Britain ticks up it does seem to benefit Spain and Portugal quite soon afterwards.

    • Hi Pavlaki

      Don’t worry I used to enjoy a bit of off piste skiing myself! As to the UK Pound £ versus the Euro I think that the latter has benefited from a stronger economy and the £ does every now and then feel a tinge of vertigo when it looks at the trade figures. What do you mean by 87% though as you have me a bit confused there?

      I am pleased that Portugal is benefiting as sometimes it feels like Spain and Ireland grab it all. I hope the weather gets better and also reaches Morocco as my mum is off tomorrow for a week there. But returning to the Portuguese economy unfortunately it has been like that for decades.

      • Sorry Shaun I did not explain – it’s the Deutche bank trade weighted index for Sterling as reported on Bloomberg in an article talking about potential for Sterling gains due to its undervaluation.

  10. Over here Unicredit have been refusing loans to creditworthy people, so my money is already mostly out of Unicredit.
    Was looking into a German bank account, only found Deutsche Bank willing to give accounts to non-resident EU nationals and these accounts cost 5 or 10 euro per month …. these account restrictions at DKB & ComDirect don’t apply to non-resident German nationals

    twitter #notjust thenegativeinterestcost

    • Hi ExpatInBG

      Yes it is a bit like mortgages where fees have proliferated and going forwards bank charges will be a way of not having to declare a negative interest-rate for banks. For the saver plus ca change c’est la meme chose….

  11. Hi Shaun, Off topic, but related to one of last week’s themes-there was a piece on the news about Oxford having the most expensive housing in the country relative to earnings, and a local bus company has been considering setting up a dormitory for it’s drivers as it is unable to fill vacancies due to the cost of local housing. My prediction of the future’s happening already!

    • Hi Zummerzetman

      It is also a return to a past where employers provided accomodation. When ever Oxford gets a mention I am reminded of the Yes Minister sketch. When Anne Roberts wrote to The Times just under 5 years ago she had been too.

      “One theory why Oxford has such a plethora of road and rail links — something to do with Yes Minister?
      Sir, Jim Hacker, in Yes Minister, asked Sir Humphrey why there were two motorways to Oxford. The reply was: “Because the Minister of Transport wanted to get up to Oxford to dine at his old college more easily.” Is this a possible reason why the electrification of the First Great Western (FGW) line will extend to Oxford “

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.