How do Negative Interest Rates affect economies and the ordinary person?

On Thursday we are expecting to see a further dip into the icy-cold world of negative interest-rates made by the European Central Bank. After all the hints and promises made by its President Mario Draghi its deposit rate is expected to fall from the current -0.2% to either -0.3% or -0.4%. Also the negativity if I may put it like that will be reinforced and backed up by an extension to the Asset Purchase Program or QE via an extension beyond next September and/or a faster rate of purchases. These expectations have seen an extension to the negative interest-rate environment already.

If we look at bond yields we see that the two-year yield in Germany has fallen to -0.42% predicting a cut to -0.4% if it is right. However more remarkable is the way that five-year yields in France are dipping in and out of negative territory and the same for the two-year yields of Spain and Italy. So we see a litany of markets where price discovery has been abandoned as a method of determining economic reality and instead they depend on the cheque book of the central bank.

On Thursday if Mario Draghi carries out his hints and promises we will see the ECB take the Euro area further into the world of negative interest-rates and I mean this in terms of amount and length of time. What impact will this have?

Is it necessary?

There is a real problem here as this morning we have seen data which suggests that the Euro area economy if not surging is doing okay. For example there was this from Germany.

In October 2015, roughly 43.4 million persons resident in Germany were in employment….. Thus employment surpassed the record high observed in September 2015 since German reunification.

Employment has been a leading indicator in the credit crunch era ( in the UK for example) but you could argue Germany is a special case. But there has also been this for the whole Euro area from the Markit PMI.

The eurozone manufacturing upturn gained further momentum during November, with rates of expansion in production and new orders the fastest for around one-and-a-half years. Growth was broad-based by country, with output and new business inflows improving in almost all of the nations covered (the exception being Greece).

As monetary policy is already very expansionary then the ECB seems set to make a policy error on Thursday. If recent speeches are any guide it will claim that the improvement is due to its policies (skipping over the oil price fall) and point us towards inflation being below target. It may even highlight the -0.4% CPI inflation reading in Italy.

Sweden is an example

If we look to see what negative interest-rates can do in an environment of falling oil and commodity prices let us look yesterday’s development in Sweden.

Sweden’s GDP increased 0.8 percent in the third quarter of 2015, seasonally adjusted and compared to the second quarter of 2015. GDP increased 3.9 percent, working-day adjusted and compared to the third quarter of 2014.

This would in the past have a central bank looking for the punchbowl so they could take it away but of course the Riksbank has its foot firmly on the accelerator as it indulges in pro rather than anti cyclical policy. If life was that easy then central bankers would be found permanently on the beach or ski slopes before we realised we could just open the taps permanently and fire them. The catch? Here is a clear example if we look at private-sector debt.

Most of the increase can be explained by housing loans, which increased by SEK 196 billion and amounted to 2 655 billion in total in October. Housing loans had an annual growth rate of 8.1 percent in October, which is an increase compared with September when the growth rate was 8.0 percent.

The consequence of this for house prices can be filed under this from the Black Eyed Peas.

Boom boom boom (Gotta get get) [x4]

Boom boom boom (now) [x2]
Boom boom boom [x2]

House prices in Sweden have risen by 2% in the quarter to October and by 10% on a year before with a few districts in Stockholm rising at over 20% annually. If we look back we see that house prices have reached “escape velocity” since the Riksbank started cutting interest-rates. The house price index of Sweden Statistics was 492 at the end of 2007 and was 668 at the end of the third quarter of 2015. What credit crunch house prices might say?!

Is that what the ECB is aiming for in the Euro area where debt both private and public sector is compared to assets (house prices) more favourably? My argument which I am sure that prospective house buyers in Sweden will agree with is that would be misrepresenting inflation and is we allow for that more accurately a lot of the recorded economic growth fades away.

How did a housing boom work out for Spain and Ireland in particular?

Interest-Rates for the ordinary person

These have not turned out to be as expected or hyped. Let me give you an example from  Statistics Sweden to illustrate this.

The average interest rate for housing loans for new agreements was 1.59 percent in October, which implies that it increased compared with September when the average interest rate was 1.58 percent.

Whilst there may be an occasional example of negative mortgage-rates, for example ones set in relation to official rates as happened in the UK, they are still a fair way away overall. So much lower but not negative is the message here.

In the world of savings and in particular bank deposits then negative interest-rates were assumed to be something that would be passed on very quickly. But in fact banks have generally avoided this. For example I have just been searching in Sweden and if the online tables are up to date you can get 0.3% for a year with Nordea Bank. Not much but also not negative.

However “the times they are a-changing”. Remember this that I pointed out on the 19th of October?

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.

A small Swiss bank is dipping its toe in the water of negative interest-rates for savers and depositors. Interestingly quite a few places have been reporting this as news in the last week or so which puts them more than a month behind us and in the category of slooooow news.

What we take forwards from this is that it takes at least a year for the impact of negative interest-rates in the wholesale and money markets to reach the ordinary person. That year is only seeing a dipping toe rather than a wide scale move. Maybe that will change should we see more countries dragged into the supermassive black hole that is negative interest rates but as we muse on the subject that is the evidence so far.


There are various lessons to be learned from the negative interest-rate experience so far so let me explain them. Firstly dips into the pool seem to create the demand for further reductions as we hear Agent Smith calling for “More! More!”. Secondly no-one has yet escaped from it and I am thinking of Sweden here as you might think that an annual growth rate of nearly 4% would provide such an opportunity. Thirdly the danger is of overheating private credit and loans leading to a house price boom. Fourthly there is the oddity of such a policy being pursued when the outlook for the countries concerned was already being boosted by lower oil and commodity prices. This makes us wonder if genuine economic improvement is what is being planned or not? So in summary we turn to Coldplay.

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,

For the man and women in the street then negative savings and deposit rates have in general not occured and I think the banks are afraid of what would happen. However as time passes that will change and the negative interest-rate sage will take another dark turn.

Meanwhile there is another feature which is geographical and that is that the countries afflicted are in or near to the Euro area. Even the IMF seemed to abandon its “on track” methodology yesterday as in essence adding the Chinese Renminbi to its Special Drawing Rights saw quite a reduction for the weighting of the Euro.






18 thoughts on “How do Negative Interest Rates affect economies and the ordinary person?

  1. Hi Shaun,
    Great piece as ever. I am not an economist, so may have misunderstood all of this. However, it does seem to me that all the old consensus about:
    1. Growth and inflation cycles;
    2. Government borrowing as a percentage of GDP;
    3. Printing money debasing a currency;
    4. Interest rates and growth
    Have all been ditched by the central bankers on our behalf. It is as though they have all decided to do the same very bold experiment at once (led by the Japanese in quantum terms, I guess). No-one has any explanation as to how all this is going to end happily, as far as I can tell, or indeed end at all.
    I cannot help thinking that there is some cliff that we are going to go over when people wake up to what is happening.

  2. ‘So we see a litany of markets where price discovery has been abandoned as a method of determining economic reality and instead they depend on the cheque book of the central bank.’

    It seems incredible that even when a country like Sweden has every opportunity to raise rates(according to their playbook),they don’t on the basis they’d like more of the same.It’s as if 200 years of pretty well documented economic history has never happened.

    Paul Hodges hit on a pertinent theme on Monday;
    ‘Media hype over the potential for a 0.25% interest rate rise by the US Federal Reserve is well underway. But as often happens these days, this is missing the bigger picture.

    The issue is simple: developments in China are far more important to the global economy than anything the Fed might, or might not, do in 2 weeks’ time. China, after all, was responsible for half of the $35tn of global stimulus since 2009, compared to the Fed’s $4tn.’

    As time goes on and the Western CB’s keep playing these deck chair swapping games,they are actually contributing to their own irrelevance longer term.

    If all these games do is beget a currency crisis,all they’ll have achieved is to cause a bigger crisis than the one set out to cure.

    • Hi Dutch

      I took a look at your link and his point about US bond yields really rather depends on where you start from. The ten year Treasury Note yield was 3% as 2013 moved into 2014 and was higher a year ago that it is now. Today saw a price rally and yield drop as we wonder again what a price actually tells us in these times.

      If he wanted a surge there is the two year yield which has become popular although then you have to explain why it has been rising since the spring of 2013.

      As you say it is all rather reminiscent of “spinning around” by Kylie Minogue.

  3. As the archetypal ordinary person, I reckon negative interest rates are standing in the way of price disinflation that would be of huge benefit to me, and those like me.
    Robbed by the Banksters and their political vassals yet again.

    • indeed Buzz ,

      to quoth a certain pollie

      “its the Banks, Stupid ”

      should be shouted from every roof top from every MSM orifice

      instead we get tumble weed……..


      Here have some popcorn , the view is good , sit back and watch the show ….

  4. Hi Shaun

    You seem to suggest that the toe in the water re negative rates will lead to a call for more in order to reignite the inflationary fires. However, this process seems to build deflation or disinflation (via capacity effects etc) rather than what is desired and one has to ask: how far can this go?

    As you have said such negative rates have not been passed on to retail customers so far and what has actually happened is that lenders have maintained their spreads by increasing rates to borrowers so rates have actually gone up not down – a perverse effect!

    Furthermore even if negative rates were passed on surely it would depend on the numbers. There isn’t much difference between 0.1% and -0.1% on your savings but what if it went to -2% or -3%? Are savers really going to put up with this ? I can’t believe it.

    And what of the collateral effects on things like insurance and pensions, already severe? If this goes on it not only means that private pensions will be trashed and company schemes will be forced to renege on their promises and this is not what people will want to hear.

    You can understand all this of course; inflation favours the debtor and deflation favours the creditor and, as we have around $57tn more debt in the World than seven years ago, inflation is the default of choice because it is stealthy and plays to the money illusion. Somehow though I don’t think it will work.

    • BobJ

      its the intended effect !

      The Banks , despite what MSM bleats on about , are in fact bust !

      I share you concerns on Pensions , think about whats happened – you know work place pensions yadda , yadda !

      Think then on the returns and then what joe public will think when they find out for every £100 they will get about £97 back after the first year !


      We are entering the next deflation cycle with the main stops already pulled out and there is nothing for it but QE ( QEterernity) infinity

      QEI – you heard it here first , folks.

      There will be rate cuts for CB for Banks to be pushed into other lending – but no one wants to borrow – we’ve seen that . So its to stop hot money slooshing around

      Soon as the MIRP hits the high street ……. Well would you leave a single pound in any bank knowing that you’d have 99p the next day ? ( yet alone 97 pence!!) .

      Can’t you hear, can’t you hear the thunder?
      You better run, you better take cover”, yeah

      Men At Work – Down Under

      Frankly I think they will try that , after all I doubt they learn’t a single thing from the Cyprus debarcle ……

      Dutch had it , they are out to make crisis out of problem , full blown and with WWIII attached if they are incompetent enough


  5. Hello Shaun ,

    One more position , I think you are verging on the inevitiability of high street negative rates – for savers , current accounts but not loans ?

    I think so too and this sorta explains why the sofa with some popcorn is the safer way to watch …..

    ” To reach the top in large complex organizations……… requires a sufficiently large ego and hunger for power to be willing to self-promote, lie, betray, and claim credit for the work of everyone else, and shift blame for failures elsewhere.”

    Thinks of any one ?? 😉


    • Hi Forbin

      After her claim that China had reformed (hence the Renminbi introduction to the SDR basket) I guess Christine Lagarde currently tops that list. After all there is the perversion of the IMF, Greece being “on track” and “shock and awe” to add to the list. Oh and whatever happened to her fraud trial?

      As to negative interest-rates we will find out more beginning on Thursday from Mario Draghi and then over subsequent days from Sweden,Denmark and Switzerland but the “lower for longer” refrain of Forward Guidance for once seems appropriate. In such an environment the retail saver will no longer be immune from it.

  6. Hi Shaun
    Thankyou for a thought provoking
    It seems to me that most,if not all
    economies will continue to stagnate until the
    Black Swan event arrives. For the “Ordinary
    person” it depends on their situations. for
    those with a mortgage, negative rates would
    give them extra income supplemented by, as
    you regularly say, the present currency and
    commodity situation. and those who have to rent
    won’t have any of these advantages and
    unfortunately will have to live in wonga-land.
    On a topical theme, in your world
    of statistics, has anyone ever calculated the
    effect that design, manufacture, sale and
    deployment of weapons has on global

    This has nothing to do with today’s topic, but
    it is special.


    • Hi JRH

      I guess that all the nuclear weapons tests and of course Hiroshima and Nagasaki have had an effect although I remember watching an edition of Horizon a couple of decades ago about Global cooling. So according to the theory then they were favourable. Oh what a tangled web and all that!

      The waste of valuable resources on weapons though is an important point and I do not know who has measured that. It seems worthwhile for the defeat of Hitler but that had an end whereas what we keep getting involved in these days seems to have no clear end.

      As to your Black Swan I think that to get out of this we will need a 2001 A Space Odyssey style something wonderful. Anybody seen any monoliths lately?

      Thanks for another great music video, the Learning to fly one went down well with everyone I showed it too.

  7. My experience as someone with a Eurozone bank account with Santander in Spain, I think negative interest rates are showing themselves as bank charges. This year I have been charged 10 euros for my bank account and 28 euros for a debit card, whereas in the previous 10 years I have had the account there have never been any charges.

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