The establishment continues to push for ever more negative interest-rates

One of the economic features of these times is the spread of negative interest-rates and the last 24 hours have seen some developments on what feels like an ever-changing landscape. The first is in the conspiracy theorist area or  perhaps the Outer Limits as President Obama meets US Federal Reserve Chair Janet Yellen after this.

It is anticipated that the closed meeting of the Board of Governors of the Federal Reserve System at 11:30 AM on Monday, April 11, 2016, will be held under expedited procedures………Review and determination by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks.

The US discount rate does run on a different cycle to other US interest-rates as there were votes for a rise over a year before the Fed Funds rate change at the end of last year.

The International Monetary Fund

You might think that the IMF would be busy with the economic disaster it has helped create in Greece plus the problems of Ukraine for a start. But apparently IMF Direct has time to meddle elsewhere! Here is their opening salvo.

We support the introduction of negative policy rates by some central banks given the significant risks we see to the outlook for growth and inflation.

I note that the IMF also tries to put up something of a smokescreen by quickly referring to real interest-rates.

There have been negative real rates in a number of countries over time; it is negative nominal rates that are new.

In the UK we have seen more than a few periods where we have had spells of negative interest-rates where inflation has exceeded the interest-rate. For example once the Bank of England cut its Bank Rate to 0.5% in the spring of 2009 we saw a sustained period of negative interest-rates which peaked when the rate of consumer inflation rose above 5% in the autumn of 2011. Indeed this was only ended by the falls in inflation which we have seen over the past 18 months. But care is needed here as the concept of real interest-rates is clear from an Ivory Tower but much harder in practice at ground level through the clouds. Which interest-rate goes with which inflation rate or more precisely forecast of inflation rates? The European Central Bank has got itself into quite a mess with its 5yr5yr breakeven indicator. Introducing may have seemed a good idea but the reality has been more like this from Led Zeppelin.

Been dazed and confused for so long, it’s not true.

What does the IMF say?

It tells us this.

Although the experience with negative nominal interest rates is limited, we tentatively conclude that overall, they help deliver additional monetary stimulus and easier financial conditions, which support demand and price stability.

The obvious issue is the continuing establishment drive to obfuscate over “price stability” as to most people it would mean an annual rate of inflation of 0%. Of course this would be difficult for the banks and the world of debt we have built up so there is an establishment drive to convince us that an annual rate of inflation of 2% per annum is “price stability” Intriguingly even a puff piece by Bloomberg on Christine “Shock and Awe” Lagarde implicitly admits this.

We are currently seeing, not unexpectedly, the weakening of some banks and their business models.

I have no idea how the IMF can claim that negative interest-rates have supported demand as for example in the Euro area hey have come with a number of other measures. The financial repression of savers operates in exactly the opposite direction and ironically banks are being affected adversely too. We know this by the new measures to support them or to insulate them from the effects. So the initial praise turns into something of a house of cards in my view. Or to put it another way Christine Lagarde tells us this.

And as I’ve been saying, if we hadn’t had negative interest rates, we’d be in a much worse place.

She either cannot see or does not want to the link between ever more monetary easing and this.

JM When you look around the world, in which countries have politicians not done enough?

CL On structural reforms, I think it’s pretty much across the board.

Or if you like the moral hazard question, of which this is an example.

More detail

Here we get something of a confession that the establishment is targeting equity and property price rises.

Lower risk-free wholesale rates have tended to encourage investors to switch from low yield government securities to riskier assets such as equities, corporate bonds, or property

The argument that businesses will borrow more has had something of a dose of reality from the German numbers published this morning. From EZR News.

business lending 4Q2015: -2.3% y/y, 3Q2015:-3.3%(rev) y/y 4cast 1Q2016:-4% (y/y)

There have been examples of falling interest-rates at the retail level for example this was tweeted only yesterday. Although of course the danger is that the price of the product is higher to compensate for this.

However the picture is not as clear as some might say as in Switzerland mortgage interest-rates initially fell but after a period then backed-up and rose.

The last paper dart arrow of the IMF is in flames before it even leave their hands.

The impact of negative central bank rates on the exchange rate has been mixed.

With the Japanese Yen having risen through 108 earlier and the Euro being around 1.14 versus the US Dollar that’s a no as is this. From Bloomberg on the Swiss Franc.

The franc has been climbing, again. Since hitting a low of 1.12 against the euro on Feb. 3, the currency has gained almost 3 percent, and is now trading just below 1.09.

So it has been rising against a Euro which has been rising itself. Of course we have the issue here of competing currencies with negative interest-rates at -0.75% and -0.4% respectively.

Where the IMF and I do have some agreement is to what they call the limit of this.

Ballpark estimates by staff for the tipping point at which a move into cash would become worthwhile range from minus 75 basis points (bps) to minus 200 bps.

The lower bound like so many other lower bounds is in play in Switzerland and one official interest-rate (-1.25%) exceeds it in Sweden but 2% seems to me to be around the point where we would mimic a famous horse race in California and see a “dash for cash”. Here we could see all sorts of implications such as further restrictions on the use of cash a subject I have analysed several times now. There will be more of you thinking about the ECB’s plan to scrap the 500 Euro note and Mario Draghi being a fan of 2unlimited.

No no limits, we’ll reach for the sky!
No valley to deep, no mountain too high


There is ever more pressure for negative interest-rates from the establishment and the IMF has formally joined the march with the IMF Direct note and the words of managing director Christine Lagarde. Of course in 2014 we learnt that the IMF had not only become a convert to fiscal easing after the political takeover it is also a fan of monetary easing as well.

This essay argues that a two percent inflation target is too low. It is not clear what target is ideal, but four percent is a reasonable guess,

Higher inflation targets and negative interest-rates whatever next? Still George Orwell will get some publicity as the ever higher inflation targets will no doubt continue to be presented as “price stability”.

Meanwhile the moral hazard implications of all this get mostly ignored. There is th eimpact on any long-term business model which relies on positive interest-rates which means much of the insurance and pensions industry. There is the impact on savers via ever-increasing financial repression. Even worse there is that a “The Only Way Is Up” mentality is provided for bond,equity and property markets. I suspect that as so often during the credit crunch era we will find ourselves singing along with Richard Ashcroft and the Verve.

Now the drugs don’t work
They just make you worse





18 thoughts on “The establishment continues to push for ever more negative interest-rates

  1. So far this has been a marginal issue, just talk.

    But if we ever get to the position where serious (<-1% say) are foisted on the retail customer then the peasants will really revolt. I cannot see people putting up with this at all and if a concerted effort is made to ban cash ( which it will have to be) then there really will be trouble.

    To my mind it has no meaning economically; it is just a sign of the utter bankruptcy of the policy and political establishment. It won't work; all it will do is to precipitate us to the final crisis.

    • indeed Bobj,

      but as CB “play ” with MIRP/BIRP to stop “hot” money being stashed it becomes increasingly clear that such monies are not being used to productive ends as wished , but are still hopping around currencies to gain, sorry lose , as little as possible

      If such rates ever leak into the high street then there will be a real run on the Banks ( for get pensions schemes and the like , that will be a side show – a big one , but still …. )

      but technically we’re here already with 1% on ISA or less on savings with inflation being around 2-3% ( no I discount CPI as the creative price index – one thats made up on the fly from all prices that have dropped/stayed still over the past year )

      It will be in later years people will remark on what a financial “millpond ” we have now……

      and despite almost everyone one else and their respective dogs knowing this will end in tears , the BoE and pollies will state “no-one saw this coming ”

      another Cilla Black ” surprise , surprise ” moment that MSM will gloss over …..


      PS: So Shaun , $42 dollar is cheap ? , maybe cheaper that of late but average its high really

      mmmm, popcorn…..

  2. Hi Shaun
    Thankyou for todays piece.
    If 200 basis points is the likely negative
    high, at the current rate that should be
    reached quite quickly, how long do you
    I can’t stop thinking about Lagarde and
    Ry Cooder’s wonderful lyric…

    Had you living like a rich man’s daughter,
    yes I did, I really did.
    While you were living high on the hog.
    You had me down here scuffling like a dog.
    Well, the very thing that makes you rich
    will make me poor.
    The very thing that makes you rich will
    make me poor.

    • Hi JRH and thanks for the Ry Cooder lyrics.

      As a Hall and Oates fan it made me think of this about Christine Lagarde.

      “You’re a rich girl, and you’ve gone too far
      ‘Cause you know it don’t matter anyway”

      Maybe one day that fraud case she is involved in will get a verdict..

      As to negative interest-rates I think we are being warmed up for more. The ECB is on the list and if the Swissy keeps rallying so is the SNB and of course there is Japan where QE is the nearest to running out of bonds to buy. Who will get there first well so far the Swiss have led the way to the bottom….

      Mind you with oil pushing above US $42 for Brent Crude time may be running out where they can use low inflation as an excuse…

  3. It would appear that Wolfgang Shauble has seen the light and would like a coordinated world wide rise in interest rates and describes the current ever lower trend as a drug addiction. You wonder why this was not top of the agenda at Jackson Hole or Davos?

    • Hi Pavlaki

      As many of those at Jackson Hole are dealers in this particular drug then we see why it does not get a mention there. Davos is even worse.

      There needs to be a new Freakanomics chapter on the behaviour of central bankers and their acolytes and the similarities with drug dealers.

  4. Great blog as usual, Shaun.
    Regarding getting rid of higher currency notes to make it easier to bring in negative interest rates; over time this happens anyway as the notes lose their value. The $100 bank note became the largest bank note circulated in Canada in 2000, when the $1,000 note was removed from circulation. In 2015, based on the CPI inflation rate, it was only worth a little more than $75 in 2000 constant dollars; by 2020 it will likely be worth only about $68. While the Harper government got rid of the penny because its value had inflated away, there has never been any discussion in this country about going to higher-denomination bank notes, so year by year it will get easier for the Bank of Canada to introduce negative interest rates without worrying about people switching to cash.
    Regarding the IMF proposal to raise the target rate of inflation to four percent that seems to have attracted interest at the Bank of Canada, too, the central bank that gave the world the two percent target. I am reading Alan Blinder’s “After the Music Stopped” now about the global financial crisis, the best book I have seen on the subject. On p. 245 he writes: “But the idea [of raising the target rate to four percent] gets nothing but Bronx cheers [i.e. hoots of derision] from actual central bankers, who are allergic to declaring their affection for higher inflation, even if the love affair is only temporary.” Maybe that was still true in 2013. It doesn’t seem to be true now.

    • Hi Andrew and thanks

      Your point about looking at the real value of bank notes is a good one and I do not recall others making it. I did not know that Canada had scrapped its highest denomination note back in 2000. Odd isn’t it? If we look at the Euro area we know that the 500 Euro note has fallen in value on average by just under 2% per annum yet suddenly it is too large a denomination!

      Oh and if we continue to withdraw lower and higher denominations of notes and coins will we end up with only one? I am mostly joking here but only mostly…..

  5. hello Shaun

    as regards inflation and the “love affair”

    inflation went from the bogey man to a much loved friend ? wut?

    hmm, more Orwellian double-speak or just maybe

    ” four legs good ,two legs better ! ”


      • Hi Forbin

        A friend of mine is a long jumper and your mention of legs reminded me of him as recently he returned from competing in Italy and he mentioned he had been beaten by a man with one leg! Once we stopped laughing at that we got to the detail that he had 2 legs but one was of the modern artificial form. Anyway he had been allowed to jump from where he wanted so my friend got promoted a position later as of course have to jump before you touch the plasticine. So one leg the best of all?

        If inflation is now our friend – who actually believes that?- then the rising oil price which makes everything more expensive is welcome…

    • Varoufakis like all ex politicians can
      preach platitudes but in this sad
      world, Greece is small beer and
      will be messed on from a great height.
      once more

      • I find nothing platitudinous in the piece. In fact the piece is inflammatory as it riles me all the more. If what he says about his own part in the play last year is true then he was indeed accurate and could have saved Greece with a long 20 year slog had it not been for his betrayal by the Prime Minister..

        The real lesson here is how politics and economics do not mix.

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