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.

#Germany business lending 4Q2015: -2.3% y/y, 3Q2015:-3.3%(rev) y/y #KFW 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.

https://twitter.com/MGuthner/status/719108018231775233

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

Comment

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