How low can interest-rates go?

The subject of negative interest-rates has been a theme of this website since back in 2010. It is also pleasing that the two main candidates from back then ( Bank of Japan and the European Central Bank ) have indeed plunged into the icy depths having official interest-rates of -0.3% and -0.1% respectively. Added to these we have seen nations on the periphery of the Euro area forced to join the club such as Sweden,Denmark and Switzerland. You can debate which has the lowest interest-rate as whilst the headline in Switzerland is -0.75% compared to Sweden’s -0.35% the Riksbank has set a deposit rate of -1.1%.

A Problem

In essence it is not working. The issue is complex as the central banks involved are invariably using other methods too such as QE (Quantitative Easing) or currency intervention. However if we look at Japan then Governor Kuroda would have expected a higher level for the equity market and a lower level for the exchange-rate of the Yen. What he has got is a Nikkei 225 falling this morning to 15,713 and a Yen which has strengthened through 115 versus the US Dollar. If we look at it versus the UK Pound £ then the initial effect was to weaken the Yen as it moved from 170 being required to buy a Pound £ to 173. But that reversed and it is now 116.4

The situation in the Euro area is that there has been an improvement in terms of economic growth but a relatively weak one when you consider that it has thrown the monetary equivalent of the kitchen sink at it! Or as we shall see in a bit what we thought was the kitchen sink. Also it finds itself mulling a measure of inflationary expectations that yesterday was worse than when it began its 60 billion Euros of QE a month in January 2015. Not much bang for your buck there.

Lower interest-rates are supposed to stimulate an economy however I have regularly argued on here that around the 1.5% area the effect fades and may well head the other way. So we have the risk that what is badged as a stimulus is in fact deflationary. Putting it another way consumers and workers decide to sing along with the Who.

Then I’ll get on my knees and pray
We don’t get fooled again
No, no!

What is next?

Those who feared a race to the bottom on interest-rates have received quite a bit of grist to their mill over the past couple of days. The Jefferies strategist David Zervos opened the bidding on Monday on Bloomberg.

Looking ahead, I am not sure how quickly Mario [Draghi] and Haruhiko [Kuroda] will come to the conclusion that purchases need to be in the multiple hundreds of billions per month, and nominal short rates need to be LESS than MINUS 1 percent.”

I suggest when reading such thoughts you put this song by Andrea True Connection on.

More, more, more
How do you like it, how do you like it
More, more, more
How do you like it, how do you like it

Of course the ECB had already hinted promised and teased about an interest-rate cut in March. May I just point out the insanity of a 0.1% cut when 5% lower has not worked ( as otherwise why is more needed?). Anyway JP Morgan have leapt into the breach and suggested not only a cut to -0.5% in March but a further one to -0.7% in June. If you think about it then why not cut straight to -0.7%? Apparently highly paid strategists are not as talented as we are often told. Or they are admitting that this is in effect a Public Relations exercise.

At what level do we see real change?

It was thought in the past that even dipping a toe into the world of negative interest-rates would lead to a switch back towards cash. So far even as low as -0.75% this has not happened according to Denmark’s Nationalbanken.

Currently, there are no indications that negative interest rates have led to abnormal demand for cash. This indicates that the lower bound on monetary policy rates in Denmark is below the current level of the rate of interest on certificates of deposit of -0.75 per cent.

Yes that is the same lower bound that Bank of England Governor Mark Carney told us was at 0.5% before yet another u-turn. However there is a significant addition to this.

In this context, it is important that household deposits have not moved into negative territory.

So the move is going to work by not affecting most people? My argument gets reinforcement as does the idea of there being a type of what was called a liquidity trap being in play. Please note this as you will see in a minute that the proposed solution is that even fewer economic agents are affected.

The lower bound gets lower

JP Morgan have via Bloomberg suggested that official interest-rates could go much lower.

On that basis, they estimate if the ECB just focused on reserves equivalent to 2 percent of gross domestic product it could slice the rate it charges on bank deposits to minus 4.5 percent.

Okay and could everyone do that? Apparently not.

The Bank of Japan’s lower bound on a similar basis may be minus 3.45 percent, while Sweden’s is likely minus 3.27 percent, the economists said. Should they also go negative, the Fed could cut to minus 1.3 percent and the Bank of England to minus 2.69 percent in JPMorgan’s view, reflecting how the ratio of reserves to assets is higher in their economies than elsewhere.

There are two obvious flaws in what looks like the sort of cunning plan that may have been constructed by Baldrick from the television series Blackadder. Firstly narrowing the scope of the negative interest-rate regime means that it is even less likely to work. Secondly what if the amount of reserves changes in response to the new interest-rate? Central bankers could end up like a dog chasing its tail with the difference that dogs have the sense to stop this game after a while, whereas I am not so confident about central bankers.

Also central bankers place a lot of emphasis on Open Mouth Operations and confidence as expressed in Forward Guidance well how will this work for Mario Draghi if he cuts to -4.5%?

And now we are at the lower bound, where technical adjustments are not going to be possible any longer.

That lower bound was at -0.2% which of course has already been breached.

The United States

There are calls for negative interest-rates there too. But there may well be a problem according to Bloomberg.

Most notably, it is not at all clear that the Federal Reserve Act permits negative IOER rates, and more staff analysis would be needed to establish the Federal Reserve’s authority in this area.

Oh well I guess we might find a new act on its way….


There is much to consider and let me remind readers that it is my opinion that we will see the sort of response to negative interest-rates that everyone is afraid of – a dash to cash – at around 2%. This estimate is based on the costs of this and human psychology and inertia. However that assumes that there is cash to dash to and as I pointed out a week ago the establishment is on the case. From Harvard University.

Our proposal is to eliminate high denomination, high value currency notes, such as the €500 note, the $100 bill, the CHF1,000 note and the £50 note.

The justification is familiar.

Global financial crime flows are estimated to amount to over US$2tr per year. Corruption amounts to another US$1tr.

What they fail to address is the fact that most of the corruption and financial crime starts at the top these days! So their arrow will miss the target but not us.

Meanwhile the plan is to cut interest-rates ever lower and to make sure that the banks are not too badly affected by it . Yes it is always the banks. Meanwhile it troubles nobody seemingly apart from me that you only have higher doses of medicines which work not ones which fail. Anyway here is a song from The Cranberries for the latest proposals.

In your head, in your head
Zombie, zombie, zombie
Hey, hey
What’s in your head, in your head?
Zombie, zombie, zombie

In response to a request in the comments I have been looking at forums, does anyone have any thoughts on Simple Press?



20 thoughts on “How low can interest-rates go?

  1. Hi Shaun

    An interesting post on ZH re DB:

    If you read the part re NIRP (6) you will see the arrogance and hubris of the banker class being given full reign.

    If NIRP with serious negative rates does come to pass what it will amount to is a universal bail in without legislative consent, effectively wealth confiscation and a complete obliteration of the concept of moral hazard.

    With all this talk of NIRP I am ever more of the opinion that TPTB are intending to wreck the system, create a crisis so that fear within the population makes it that much easier to demand sacrifice to keep the system afloat and create the conditions for the next crisis.

    It is the thrashing about of a system which is trying to solve what are structural and solvency problems with monetary policy and it is doomed to failure.

    • Hi Bob J

      In essence negative interest-rates are a type of tax and so the proponents need to explain how taxing money is a stimulus! You are right about Deutsche’s point 6.

      “instead of making them punitive on the banks allow the banks to earn the spread, make them punitive to savers..”

      Could it be more self-serving? In essence that have made a litany of mistakes but it is always someone else who should be punished be it the taxpayer or the saver.

  2. Hi Shaun, it’s a race to the bottom and no mistake, who knows where it’s taking us, as things spin further out of control, gradually at first but with control ebbing away all the time. Years ago when I was taking flying lessons I was told if something goes wrong you should reverse the last thing you did. It’s advice which has stood me in good stead in several ways over the years and I wonder why nobody at a central bank has stopped for a moment to wonder if this might not help.

    It puts me in mind of The Race by Yello;

    Are you ever gonna push me let me run and let me do?
    I need it and I’m ready and I haven’t got a clue
    Not any track is turning but the race is in my head
    I’m attacking the illusion but the stopping drives me mad
    Fire away
    This is the race

    Give me the race

    As to a Notayesman forum, yes it’s a great idea, and Simple Press would seem to dovetail nicely with Word Press.


    • Hi Andy

      I haven’t seen a mention of Yello for a while so it gets a definite 🙂

      As to the issue I often think of the bit before the often quoted line from Hotel California which makes the same point as you.

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

      However central bankers are trapped by another line.

      “And she said “We are all just prisoners here, of our own device””

      Thanks for the thoughts on Simple Press

  3. Hi Shaun
    You don’t bet against the Fed. The ‘put’ is being replaced by the ‘call’. Yellon will not give the markets what they want in her statement later today.

    • Hi JW

      You turned out to be right with the S&P 500 pretty much flat with the Dow down and NASDAQ up there was no salvation to be found today for equity markets. Mind you the Fed needs to decide what its current position is…

      There will be some relief that Japan is closed for National Foundation Day as the Yen has rallied to 113.4 versus the US Dollar which is quite a reversal for Abenomics.

  4. It’s all getting somewhat weird and another bout of QE looks likely. Time for debt jubilee? Could the indebted have the last laugh?

    • Hi Peter

      I argued a while back that the US Federal Reserve could raise interest-rates and later start QE again giving us QE4. That was a thought then but not it is building a block of evidence to support it……

      As to a debt jubilee, only for the 0.1%?

  5. I’ve got a fair few premium bonds and have just realised I’ve not had a prize in some while. They advertise interest rates at 1.35% on the website so why the sudden dearth? At least the interest rate has not been cut negative yet. How might they do it though? Start chopping numbers off the ones you have? Demanding that rather than getting prize cheques you send them cheques each month? Perhaps we all go into ERNIE and one unlucky person is selected each month to give NS £1million?

    • well then , who ever it is can borrow from the Banks at -3% MIRP/BIRP

      he will never have to pay it off because it will “evaporate” to what his house is worth in 25 years ……

      ( but he may have to pay installments back …. )


  6. Hello Shaun,

    some of these inter CB / Bank rates may “work” so long as they remain in the lofty towers of high finance but on the high street ?

    Pay to take cash out – well you do , don’t you ? already if I take cash out of a EU bank ( in euros) I get charge for the actual transaction as well as exchange rates )

    So I’ll get charged for making any transaction ?

    No wonder there’s talk of banning cash , after all pensioners already take cash out once a month and then pay bills by cash……

    Then theres the effect on pension schemes ……. ( and we’re forced into them now , right ? )

    Its already been seen that institutions will be asking for monthly ( if not weekly , imagine that? ) installments as they will loose if paid all at once .

    Cyprus bail-ins? after all cash is for crooks now , isnt it ?

    Group think – I worry that this MIRP will hit the high street because our Pollies can’t think differently, then with so instability in the ME , rumours of KSA sending in troops to Syria ( which isnt legal but hey , neither was Poland 1939) .

    Interesting times…..


    • Hi Forbin

      I am not so sure that they work in the bastions of high finance either. Point 6 that Bob J was quoting earlier is a clear sign that the banks want the pain shifted form them to us.

      The loose cannon right now is Japan especially with the Yen motoring like it has been tonight.

  7. Hi Shaun – nice article.

    Riksbank meeting today and results tomorrow – looks like the markets have priced in a 0.1% cut for tomorrow and then potentially another in April.

    Firsthand experience is showing that house prices (mainly apartment prices in cities such as Goteborg and Stockholm) are going crazy – most go between 10-20% over asking price in their Scottish-style bid system, whereas here in Norway, where a cut is expected on 17 Mar, house prices have started to turn. Hard to see what is the long-term outcome – a huge relative population increase in Sweden could keep housing market buoyant, but at what point will it burst? Unofficial reports showing that apartment prices already up 5% mom in 2016… but the banks keep on lending..

    Interesting times.

    • Hi Dog Leg and welcome to my website

      Ah the Swedish Riksbank! It has been quite a road from sadomonetarists to Krugmanite fanatics has it not? With Krugman having been lauded by Abe san and the Yen doing what it is tonight it is not the best of nights to be a Krugmanite. I have covered the house price boom/bubble a few times on here as I do not think that the end game is in much doubt.

      What is the view from Norway on your fellow Nordic nation?

  8. Hi Shaun, We seem to have left Lewis Carroll behind in favour of Hans Christian Andersen. Truly crazy. But will TPTB ever agree that the Emporer has no clothes. Never. Not in a million years.

    • Hi Eric

      You may be right about the change of author but if you think of a central bank policy meeting it is hard to beat this.

      ““But I don’t want to go among mad people,” Alice remarked.
      “Oh, you can’t help that,” said the Cat: “we’re all mad here. I’m mad. You’re mad.”
      “How do you know I’m mad?” said Alice.
      “You must be,” said the Cat, “or you wouldn’t have come here.”

      Mind you UK television has this week been showing Brothers Grimm…..

  9. I’m not so sure the establishment can easily foist significant negative rates on the public irrespective of whether or not cash is outlawed (made illegal tender?). Firstly the elderly hold particular strong influence over political decisions and they will be the most vocally unhappy group about NIRP/cashless society. Then there is the effect on banks. The growing Peer To Peer lending sector may still be able to offer positive rates (even 0% would still be a cash substitute) which could lead to a general drift away from banks been viewed as the natural home for savings. Furthermore many people these days have the ability to transfer money to foreign currency accounts abroad which will not necessarily be NIRPed.

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