What is the impact of negative interest-rates?

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.

Bond Yields

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.

Asset Prices

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!

Mortgage 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….

Economic growth

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.





25 thoughts on “What is the impact of negative interest-rates?

  1. HI Shaun
    If we have the conundrums of greater negative
    rates, higher property prices and falling commodities it
    doesn’t seem likely that nothing will happen. So will it be
    more bail-ins or the mother of all bailouts?


  2. Hello Shaun,

    It does make one wonder as to what the end game will be. As you and I agree that MIRP will not have a big effect until it drops to 1-2% range , after that things get a little interesting to say the least !

    So as the economic cycle and indicators point to a recession this year I wonder what the GOP and CB will do .

    If MIRP hits the high street expect rapid re-actions from the public

    I also expect reactions to pension schemes when the public are told they’ll get 98% of their money back that they put in ( or less ! )

    Frankly all they have done is plaster over the problems and hoped for the best !

    Its ok for debt so long as you can pay it back , so does this mean I can borrow £1000.00 and pay back £980.00 ? no, not for the likes of me , but ok for TBTF Banks

    so we can sub them but no-one else ?


    Ah , that depends on who’s side you are on 😉


    • Hi Forbin

      The pension scheme point is a good one. I remember Andy Z posting his illustrations including a 3% per annum loss. How does that work? Of course it does not and we are left with questions about all long – term contracts as we observe the pensions and insurance industry under heavy likey fire.Just as the UK imposes compulsory pensions via NEST.What could go wrong.

      By the way best wishes to Andy Z if he has time in his difficulties to be around.

    • “So as the economic cycle and indicators point to a recession this year I wonder what the GOP and CB will do”

      ??Hardly!! USA probably but elsewhere? I don’t think so!!

  3. Hello Shaun ,

    Is there a way or some who has , taken out the fantasy figures in GDP and given us a figure without porn and drugs? and double entry accounting ?

    I get the feeling GDP has been so adulterated as to be meaningless as a measure

    What about GNP ?



    • Hi Forbin

      I am afraid that it is from the same stable as GDP so apart from the international transfers it covers it is the same old song. Mind you there was a £2 billion revision recently (over a year I think which must therefore have been 2014) where £2 billion of international transfers was deducted from GDP. Live by the imputed rent die by the imputed rent as they couldn’t avoid it…

  4. Hi Shaun

    You say above that the SNB reports an increase in mortgage rates. I read this somewhere else and it was ascribed to the fact that the banks were reluctant to charge negative rates on deposits so were maintaining margins by increasing borrowing rates – a perverse effect if ever there was one!

    Whether this could be done if negative rates got to 2-3% I don’t know but this whole thing has to me the scent of the “doubling down” gambler desperately trying to recover losses; it’s the last gasp of a corrupt system.

    We now have the formal framework for bail ins in the EU and we now have the looming possibility of negative rates at the retail level; if either these issues crystallize, or even both, do you seriously think that people will stand for this because I don’t?

    • Hi Bob
      Yes I commented on this seemingly perverse effect of Swiss NIRP some weeks ago. ‘Markets’ ultimately ( even when dominated short-term by algos) reflect human pyschology, perceptions, emotions. These inevitably are very different to ‘economic textbooks’. Economics has never been able to deal adequately with chaos. As it struggles with differentiating between velocity and acceleration, how can it ever deal with quantum mechanic effects?

  5. Hello Shaun

    I meant to post this yesterday about accountability issues


    “Right up there with hunger, sex, and greed, one of the most powerful forces shaping human behavior is cognitive dissonance, the discomfort we experience when we make mistakes that jar our feelings of self-worth.

    As with hunger, when we experience cognitive dissonance, we hasten to reduce it–in this case, by attempting to justify the mistake. Because our brains are hard-wired to reassure us, most of the time we don’t even realize the psychological gymnastics that are taking place.”

    I think that explains what we see (!)


    • Interesting as it reminds me of a BBC news section on Nick Leeson recently a subject close to my heart as I worked at Baring Securities although I left before he blew it up. Bizarrely he lectures on that sort of thing as we learn again that Ivory Towers are far in the clouds!

  6. TPTB can say what they like about improving economies, but as long as interest rates are where they are, or even getting worse, forget it.
    The one true thing that has been said was about BoE 0.5% rate being an emergency rate, and as long as we have that, or even slightly higher rates, the emergency remains.
    The FCA enquiry into banks is a waste of time. You can’t teach a zombie new tricks.

    • Hi therrawbuzzin

      Well to use the theme of the week there have been few or indeed no signs of ch-ch-changes in the UK establishment and as someone quoted to me earlier this week there is this line in it.

      “Where’s your shame
      You’ve left us up to our necks in it”

  7. Hi Shaun
    A 3% world will just work a lot better than a ZIRP/NIRP world, for all sorts of reasons with all sorts of effects.
    That is why I belive Yellen will continue the rises in face of deteriorating numbers. There just is no other choice. The BoE will follow and eventually so will the ECB.
    Of course nothing ever happens linearly, so just as everyone thinks oil will fall to $10 it will rocket back to $80 ( myriad of reasons why it could); China cracks; inflation takes off, and rates soar to 5/6%.
    What you can say with some degree of certainty is that all the things we are worrying about today will be replaced by new worries soon.
    We live in an unstable . multi-dimensional system , with the ‘butterfly effect’ alive and kicking.

    • Actually I think you’re wrong here and Yellen won’t hike any further. I also think they might start QE4. I think whatever they do they will lose whatever remains of their credibility and they will be exposed as fools. I actually agree with your first para but the CBs got themselves into a box a number of years ago and they can’t get out now.

    • Hi JW

      I just wanted to add that similar thoughts were in my mind when back in 2010 I argued for Bank Rate to rise to 1.5% and then 2%. As well as helping with the inflationary burst that was to come it would make things more balanced or as Hotel California puts it.

      ” Last thing I remember, I was
      Running for the door
      I had to find the passage back
      To the place I was before”

  8. Hi Shaun,
    Very interesting (with shades of Rowan & Martin’s Laugh-In). As a 1960’s student of economics I often wonder what’s true and what isn’t when trying to make sense of it all. If the textbooks have failed then surely the (Treasury/BoE) economic models must be suspect too. Is that why forecasts have been so bad? Or have they been updated to reflect the new reality? (or perceived reality).

    How bad (or low or high) do things have to get to trigger another catastrophe ? Is it even possible to detect if we’re close to another “Lehman’s moment”? Or have we entered new era in which no matter what happens (within reason) to rates, yields, prices, values we are stuck in a sort of groundhog day with no way out – the Zirp/QE trap. But history shows us that things always change.

    Curiouser and curiouser said Alice.

  9. Shaun, one think that may change the B of E approach to interest rates is if Sterling exchange rate takes a serious dive – and that is looking more likely by the day. There is nothing really serious going on that warrants this ( compared to say the Euro ) and yet trader sentiment is becoming very negative to Sterling. There is the Brexit issue and a delay in interest rate increase expectations but the Eurozone has its own political and economic issues and yet the Sterling sentiment is definitely negative and getting worse. By contrast, the Euro bulls are back. As my friend said – never mind the fundamentals, follow the sentiment! Any thoughts?

    • Hi Pavlaki

      I agree and opened the year with this which has so far worked out to be true.

      “The “all bets are off” disclaimer could come if the UK Pound continues its recent weaker phase. I am a little worried by its prospects for 2016 and should it dip it tends to do so sharply.”

      Tactically have we done enough for now? But overall to add to your sentiment meter is the fact that the UK economy has shown signs of a bit of a fade with downwards GDP revisions and this week’s poor production numbers. So there is some fact as well at a time when relative economic performance has been influencing exchange-rates.

  10. I read an article recently about how one of the Swiss cantons has asked its citizens to delay paying their taxes until just before the deadline. The reason is that early payment leads to the local government losing money due to the negative interest rates on their commercial bank account. Another example of reality inverting under the financial repression. Will early payment of all bills need to be criminalised?

    • Hi Redshift and welcome to my corner of the web

      It does pose a real question and is an add-on to the issue raised for the pensions and insurance industry that I have discussed with Forbin above. For those that have not seen it here it is from SwissInfo.

      “Taxpayers in parts of Switzerland this year face an unusual request from fiscal authorities: please delay settling your bill until as late as possible.

      Zug, the affluent canton outside Zurich, has announced it is ending discounts for early payment of tax bills. The reason? The longer it has cash on its books the more likely it will incur costs as a result of negative interest rates charged by Swiss banks. The canton calculates the move will save CHF2.5 million ($2.5 million) a year. “

      • Perhaps the next stage will be discount for the latest possible payment. And what about penalties for non-payment of tax. Could we see the Swiss tax authorities offering a discount on the late payment of a penalty for non payment of tax.

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