If I look back I note that the prospect of negative interest-rates has been a theme of this blog since 2010. Back then I was in a minority considering the issue but now of course we have a reality which cannot be ignored which is centered on the Euro area with the European Central Bank (ECB) having a deposit rate of -0.3%. This applies as of yesterday to some 775 billion Euro’s in the deposit and current accounts of the ECB. Such a reality has had quit an impact on the countries surrounding the Euro are as we see that Sweden has an official interest-rate of -0.35% and Switzerland of -0.75%. There is also Denmark which has a central bank which is so nervous of what might happen that it raised interest-rates by a mere 0.1% last week.
The monetary policy rate spread to the euro area is thereby narrowed from -0.45 to -0.35 percentage point.
You may note that the new interest-rate of -0.65% was defined with reference to the Euro as we wonder if anyone particularly took much notice outside the boardroom of the Nationalbanken. Not perhaps the Swedish Riksbank as I note speculation today that it will cut again to 0.5%. So what have we learnt and what are the consequences?
A dash to cash?
There were theories before negative interest-rates became a reality that there would be cash hording because currency has a 0% interest-rate. However we can now say that there have been few i any signs of this so far. The one dash for cash in 2015 was seen in the Euro area but it was driven by fears of possible haircuts at Greek banks rather than negative interest-rates.
So we see that at interest-rates down to 0.75% there seems to be little or no effect. Whether the fact that the Scandinavian countries are in the van of using less cash and more electronic forms of payment is an influence is hard to say. But we can be sure that central bankers around the world will have watched this development. Stanley Fischer of the US Federal Reserve certainly has been.
Cash holdings have not risen significantly in these countries, in part because of nonnegligible costs of insuring, storing, and transporting physical cash…. It is unclear how low policy rates can go before cash holdings rise or other problems intensify.
As to the begged question I would say between -1% and -2% I would expect more of an effect.
This is something that was not thought through at all well before the credit crunch hit. But many bonds in the European scene have seen negative yields with estimates hitting the 3 trillion Euro mark. As I type this even Italy is on the threshold (0.01%) at the 2 year maturity and Germany is at -0.14% even at the five-year maturity. In Switzerland even the 10 year yield is negative (-0.13%) as we see that in essence its bond market has seen not far off a replacement of positive yields by negative ones.
This development has heavily influenced the financial landscape in Europe and indeed the rest of the world. This is because those looking for positive yield have found themselves looking at UK Gilts and US Treasuries. In my opinion this is one of the reasons why yields in those two countries have not risen and in some cases fallen giving them rather extraordinary yield patterns if you compare them to economic developments. Another credit crunch first.
However things just like in the cash or currency world have not developed as one might have expected. In fact bond markets with negative yields have seen more and not less demand at times in a type of perverse or inverse demand curve. Why? I think that this has been driven by overseas investors where 2 other factors have swamped the prospect of a yield loss. The first is currency expectations and the second is fears of haircuts in other banking sectors. After all if you were Russian, Ukrainian or more surprisingly perhaps Australian or Canadian then currency movements in 2015 were a much bigger influence than any negative yield.
We also have the issue of QE which has been used to drive bond yields lower at the same time. This makes me wonder if we will ever have negative interest-rates in a non-QE world as well as with the reluctance of countries to reverse QE whether it will be permanent or at least permanent in most of our lifetimes.
Links to the real economy
Here we have had some connections but in a rather familiar theme some disconnections.
Well the clearest case here of what might be a typical Eurovision entry of “bang boom boom” has been demonstrated by house prices in Sweden. From Sweden Statistics this morning.
Real estate prices for one- or two-dwelling buildings increased by more than 2 percent during the fourth quarter 2015, compared to the third quarter. Prices increased by more than 11 percent on an annual basis during the last quarter, compared to the same period last year.
As ever in such a situation the heat is on in the cities and three municipalities are reporting annual increases of over 20%.
The situation with equity prices is more complex with a myriad of issues not least the falls in 2016 so far. But as I type this the Eurofirst 300 equit index is at 1317 or around 70 points lower than when the ECB make the fateful decision to go negative with its deposit rate.
What about interest-rates for the common (wo)man?
This has been intriguing and is one of the reasons why there has not been a major dash for cash. The impact of negative interest-rates on deposits has mostly only affected institutional depositors as well as those individual’s with very large deposits. One small Swiss bank has dipped its toe into spreading this to more ordinary depositors in 2016 so we wait to see if more join. But so far negative interest-rate have not replaced near zero ones. Ironically 2016 has seen quite a few deposit and savings rates reductions in the UK where we were supposed according to Bank of England Governor Mark Carney to be getting higher interest-rates!
These initially generated some headlines as some headed towards zero and flirted with below it. However I will let Andréa M. Maechler of the Swiss National Bank take up the story.
While the introduction of the negative interest rate caused interest rates on the money and capital markets to decline, mortgage rates did not decrease to the same extent. Indeed, for long-term mortgages, interest rates are slightly higher than they were at the beginning of the year.
Then we get an admission of something we can take credit for discussing on here.
As a result, banks’ interest margins have come under pressure.1 To partially offset this effect, banks have raised their mortgage interest rates
As yes monetary policy by the banks for the banks of the banks and so on….
This again is a cloudy picture. We have the good and also the bad shown below.
The strong economic development in Sweden continued during the third quarter when GDP rose by 0.8 percent, seasonally adjusted.
Denmark: Gross domestic product fell 0.4 percent sequentially, larger than a 0.1 percent fall estimated in November and reversing a 0.2 percent expansion seen in the second quarter. (h/t RTTnews )
As you can not much light is shed by that as even the Nordics are seeing very different results from similar medicine.
As you can see this is another clear fail for the text books of economics. Although we are not as irrational as some may claim as they try to cover their tracks. But we do need in my opinion to take the advice of “You’re the one that I want” from Grease even if we don’t want them.
You better shape up, you better understand
Because if 2016 continues on its current trajectory we may well be seeing more of them and if not well we return to the issue of what central banks do when the economic cycle turns to recession again? After all the mantra is very activist these days.