Negative Interest-rates are on the march again

This week is set to see much more news on the world of negative interest-rates and yields and we are already being warned that they are on the March with Reuters reporting this.

As you can see we have a new world record as Jeff Lynne would put it. Also it is a sobering reminder of the numbers we deal with today as yet again we find ourselves looking at trillions when supposedly there is not only no inflation but Larry Summers wants us to have much more of it. More of him later but for now let us continue with the policy of NIRP (Negative Interest-Rate Policy) which followed hot on the heels of the supposed cure-all of ZIRP where interest-rates were 0% or near to it.

The European Central Bank

The Euro and the European Central Bank are like the “supermassive black hole” that the band Muse sang about with its deposit and current account rate of -0.3% sucking neighbouring countries such as Denmark, Sweden and Switzerland into being satellites to it. If we move to government bond yields we see that the 2 year in Germany is at -0.55% and the 5-year at -0.36% as I type this so both are below the buying limit of the ECB itself. Thus markets are forecasting further easing on Thursday afternoon.

The most extraordinary features of this landscape are the way that 2-year bonds in France yield -0.44% and especially that the ones of Italy yield -0.06%. These in no way reflect economic reality in those two countries and are one of the clearest examples of market manipulation around.

The president of the ECB Mario Draghi has promised us more on Thursday via his Open Mouth Operations. We can expect another deposit rate cut to -0.4% or 0.5% as we again wonder how after around 5% on interest-rate reductions another 0.1% or so can possibly be key?! Also take care as other interest-rates may well move as other central banks ( Denmark and Japan for example) have moved to protect “the precious” and we may see an effort to exclude the banks from any pain. There are likely to be more bond purchases or QE with an extra 10 or 20 billion Euros a month added. We could see another “To Infinity! And Beyond!” effort by extending the scheme but last time the response to this was on the lines of Shania Twain.

Okay, so you’re a rocket scientist
That don’t impress me much

So if it comes it is likely to be as part of a combination. Also there may be other moves to help the banks which just by chance will help the Italian banks which one Mario Draghi used to supervise. Perhaps we will be warmed up to the purchase of high quality assets ( financial lexicon for these times red alert) at a future date like he did with Asset Backed Securities.

Bank for International Settlements (BIS)

This has intervened in the debate via its Quarterly Review and has in fact explained why the Bank of England shied away from 0% let alone NIRP back in the day.

Each central bank conducted an in-depth review of its IT systems as well as of its documentation and account rules.

Actually the Bank of England was more worried about the IT systems in the UK’s banks and that a year 2000 moment might apply if interest-rates went to 0%. As we live in a bankocracy it stopped at 0.5% where we in the UK remain. Sadly the BBC’s Andrew Marr was far to busy giving free publicity to the new book of former Bank of England Governor Mervyn King yesterday morning to ask such a relevant question. Indeed the toadying reached new heights with the use of the word “legendary” by the obsequious Marr.

As to the BIS on negative interest-rates they have caught up with something which has been a theme on here for 5 years or so.

The experience so far suggests that modestly negative policy rates transmit through to money markets and other interest rates for the most part in the same way that positive rates do. A key exception is retail deposit rates, which have remained insulated so far, and some mortgage rates, which have perversely increased.

We are reminded again of the principles of Goodhart’s Law and the Lucas Critique. But we find ourselves reviewing a situation where central banks can influence money markets but the impact on the real economy is not only muted it may be inverse and perverse. An example of this has been provided by Frederick Ducrozet of Bank Pictet.

Cost of negative rates = €2bn

Against a total loan portfolio of 17 trillion Euros this is a rounding item perhaps but nonetheless it is a transfer from bond investors to governments of 2 billion Euros a year which is usually described under the category of taxation. This is a deflationary move which of course is supposed to stop deflationary trends as my financial lexicon for these times finds plenty of work.

Being based in Switzerland perhaps the BIS economists have a genuine reason to rue this development.

In particular, Swiss banks have raised the lending rate on mortgages, even as government and corporate bond yields fell in line with the money market rates

The biter bit? Anyway this is yet another deflationary influence on a policy which is supposed to provide a stimulus. If we take a broad brush view then negative deposit rates to apply to wholesale deposits but extremely rarely to retail ones. Will this continue as Mario Draghi sings along to Madonna?

Deeper and deeper and deeper and deeper
Sweeter and sweeter and sweeter and sweeter

The BIS has its concerns.

Looking ahead, there is great uncertainty about the behaviour of individuals and institutions if rates were to decline further into negative territory or remain negative for a prolonged period>

Larry Summers

Larry seems to have worked himself into a panic, are the Harvard pensioners after him again? Or has his role in the repeal of Glass-Steagal come back into the news? From the Washington Post.

Market measures of inflation expectations have been collapsing and, on the Fed’s preferred inflation measure, are now in the range of 1 to 1.25 percent over the next decade.

Seeing as the target is 2% per annum that means a small undershoot in mathematical terms. However this may be the problem as Larry does not seem to be so hot at what he would call math.

In the 1970s, it took years for policymakers to recognize how far behind the curve they were on inflation and to make strong policy adjustments.

Actually the official measure of US consumer inflation peaked at 14.8% in early 1980 so a 12.8% overshoot is the same as a 0.75% to 1% per annum one Larry? Actually perhaps someone might nudge his elbow and point out that commodity prices are now rising (Brent Crude Oil has risen above US $39 as I type this).

Larry Summers wants everyone to pay more for things at which point he will do his best to claim that the inflation created makes people better off when in fact it makes them worse off.


There will be much to consider this week on the subject of negative interest-rates. Mario Draghi has repeated his pre- December Open Mouth Operations but you see according to the Bank of England Underground blog December was a disappointment.

That means the effect of QE2 on asset prices was still notable, for example, we estimate the extension led to a 5% depreciation of the euro against the dollar and a 6% increase in equity prices. Nevertheless, the extension’s impact was still substantially less than the initial programme both because the extension was smaller and had less impact per €100bn of purchases.

The situation is complex as we had more QE and an interest-rate cut combined but less bank for your buck (Euro) is the message here. Oh and you may note that QE and NIRP are being judged in terms of the exchange rate and equity markets. One in the eye for those who claim that there is any such intention!

Meanwhile Bank of Japan Governor Kuroda has been speaking clear this morning.

The answer is very clear. Individuals and firms as a whole will definitely benefit from this policy……..Deflation will not return to Japan. Price stability with 2 percent inflation will definitely be achieved.

Of course he introduced negative interest-rates only 8 days after denying any such intentions. Still here is food for thought for Japanese depositors and savers.

In other words, the interest earned on depositing 1
million yen for a year declines by 190 yen — from 200 yen to 10 yen.


21 thoughts on “Negative Interest-rates are on the march again

  1. ‘The answer is very clear. Individuals and firms as a whole will definitely benefit from this policy……..Deflation will not return to Japan’

    • Hi Dutch

      Thanks for the video. The sum of a million was on my mind earlier as I spotted “The Million Pound Note” film on the TV schedules. Gregory Peck was the star and the idea was that the mere possession of such a banknote would mean you never had to spend anything. Such innocent times back then!

      What would be requited now a trillion dollar coin?

  2. ‘Indeed the toadying reached new heights with the use of the word “legendary” by the obsequious Marr.’

    I know we aren’t meant to be political on here but it really breaks me when I have to watch what passes for economic analysis on the BBC.They have so singularly failed to ask substantive questions of the CBers over the last fifteen years that it truly irks me that they’re able to extort under threat of imprisonment, a £145 per household, p.a. subsidy for ‘public service broadcasting’.

    Never in the field of the media has one organization failed so miserably in it’s remit.

    • I see nothing wrong with “legendary”, the horses in the Augean Stable were legendary -but they piled up a lot of sh*t.

    • Looked at from the outside, Britain doesn’t seem to have much left that has a reasonable reputation. The BBC is one such organization, so I’ve no doubt it will be closed down or transmogrified in the very near future. So fear not Dutch.

  3. The zero sum exchange rate wars with ever higher negative interest rates, does not seem to be changing any of the economies in a positive way with increasing economic growth.

    Commodity price falls show a lack of demand, countries like China have excess capacity, with many advanced countries, their banking systems and their populations having excessive amounts of debt and we are now reaching the end of the current growth economic cycle. Add in bear stock markets this is hardly a good investment environment.

    This looks like a pretty good perfect storm to me with Japan showing over the last 20 years that QE, ZIRP and now NIRP don’t work, they just seem to lock countries into a zero or at best low growth economies.

    With central banks having used most of the tools in their lockers, where does the world go from here? Do we all have to sit it out and live in hope for betters times, will there be better economic times?

    • Hi Rods

      The question you ask is a very pertinent one to the “More,More More” crew such as Larry Summers. If we return to the speech given earlier today by BoJ Governor Kuroda there is this.

      “Although markets have become more volatile, Japan’s economic fundamentals remain sound (Chart 3). Japan’s economy has improved significantly from three years ago. ”

      So sound they need negative interest-rates.? Also we get an update tonight on the Q4 GDP numbers but the previous update was a contraction of 0.4%. How sound is that?

      What we and indeed back in the day Japan needed was a proper resolution of the banking crisis, but instead we got extend and pretend. Well we are still pretending….

    • Hi Rods,
      I would suggest that all CB’s need to start to follow the Fed’s move which would lead to a global stall for a couple of years whlst the zombie companies are closed down or re financed and re -organised, then we can start to move forward whilst the banks remain in desperate need of radical reform.

  4. Toadying taken to a whole new level in Liam Halligan’s hagiographic review for The Telegraph.

    Written, for the most part, in clear, jargon-free prose – and avoiding tables and graphs – the End of Alchemy showcases the author’s ability to combine complex analysis with effective communication. And while the narrative sometimes gets bogged-down in descriptions of academic debates that non-economists may find tangential, that’s more than offset by those passages where King allows himself to write from the heart, combining his vast technical knowledge and experience with genuine passion to see meaningful post-crisis reforms.

    I never had any plans to kiss Liam … just as well really because I doubt he’ll ever truly get rid of that shitty taste in his mouth.

  5. Hi Shaun
    I’m taken with the bottom and beyond
    madness of NIRP.
    If negative policy rates do not feed into
    lending rates for households and firms,they
    largely lose their rationale,” said BIS economists
    Morten Bech, and Aytek Malkhozof. I presume
    that as the BIS board is made up of all the NIRP
    offenders, that these two gentleman will never
    work for the “Vampire Squid?!”
    With the likely outcome that mortgages
    will become perversely higher, I presume that
    pension funds will tank and currency speculation
    will be the only potential gain, again to the cost
    of the masses!


    • Hi JRH

      The extraordinary part of this is where is the bit that boosts the economy? There seems to be no such case whereas there are cases for the downside such as a perverse response from mortgage rates and the fact it is effectively a tax. The only possible gain is via exporting deflation via a lower exchange rate as you imply.

  6. Hi Shaun
    Thoughts from ‘the land of the Donald’.
    CBs don’t really do economics well, now they are dabbling in pyschology. We all know how well that will go. NIRP will mean ‘joe’ will save more, not less. And even commercial banks will lend less to pay less ‘tax’ on deposits.
    You know I think the Fed ( with all its faults) is the only chance that this crazy ‘experiment’ will be ended, maybe if there was still a deutschmark Germany would have followed quickly.

    • Hi JW

      Well if today’s news continues (rising oil price and a soaring Iron Ore one) then US Fed will be thinking of going from 0.75% to 1%. Amazing isn’t it to think of a 1% interest-rate being a big deal?

      As to the US political situation then I do not envy them their likely choice of Clinton or Trump.

      • Of course “trump” means something else in the Uk vernacular, but nonetheless still remains relevant.

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