The economic problems created by negative interest-rates and yields

One of the features of modern life is the number of official bodies telling us that negative interest-rates are not on their way. For example Bank of England Governor Mark Carney told us this only last week.

 I’m not a fan of negative interest-rate. We’ve seen the consequences of them in other financial systems. We have other options to provide stimulus if more stimulus is needed so we don’t need to go to that resort.

Only yesterday The Australian pointed out the view from a land down under.

Reserve Bank governor Glenn Stevens has scoffed at the notion of negative interest rates as a sustainable policy tool, saying “God forbid” Australia ever reached that point.

Actually both gentlemen had of course just taken their respective countries closer to negative interest-rates as we are reminded one more time to note what they do and not what they say! Overnight they have been joined by the Reserve Bank of New Zealand cutting by 0.25% to 2%. If the world economy is doing so well why is everybody cutting interest-rates? After all even Brexit surely cannot be blamed for moves on the other side of the world.

As to those wondering why the Kiwis only cut by 0.25% that is easily explained. The All Blacks had only been defeated in a rugby sevens tournament and larger cuts are reserved for defeats in the 15 a side game.

Negative Gilt yields in the UK

Unfortunately for what remains of Governor Carney’s shredded credibility negative Gilt yields are on the scene now in the UK as described by the Financial Times.

British government bond yields traded in negative territory on Wednesday.

They did so because after the QE debacle on Tuesday investors and funds knew that Calamity Carney would be sending in his buyers to purchase at almost any price, hence the record high prices and record low yields seen. As they bought medium-dated Gilts they drove short-dated Gilts higher and yields around the 2018 to 20 zone went negative. If Governor Carney does not want to face this then may I suggest a tattoo for both eyes!

The M&G Bond Vigilantes put it thus.

For the first time in history, we are seeing negative yields in the UK gilt curve. Two 19s and a 20 now trading with a negative yield.

As these are very hard times to be a Bond Vigilante we can overlook the fact that Gilt yields had in fact briefly gone negative on the day after the Brexit referendum.

Things are likely to get much harder for Governor Carney on Monday as he will be sending in his buyers to buy those Gilts on Monday and this week they avoided that as I explained on Monday. Markets may be waiting for him this time around.

Yields elsewhere are going lower

The Bank of England is adding to a trend we are seeing elsewhere. In addition to new highs for bonds in Australia and New Zealand, Spain saw its ten-year yield drop below 1% for the first time earlier this week. Only the major Euro countries have 2 year bond yields quoted but those that are have one thing in common, negativity. My subject of yesterday France has a -0.44% yield for its 5 year.

This should lead to a surge in investment surely?

Economics 101 and a whole litany of text books tell us this. Accordingly a whole slew of Ivory Towers would come tumbling down if it were not true. Well when the US Federal Reserve published research on this in 2014 ( h/t @edwardnh ) it was not so sure.

Yet, a large body of empirical research offer mixed evidence, at best, for a substantial interest-rate effect on investment.

Further on it was providing evidence that will have all the Ivory Towers moved to Pisa.

Among the more than 500 responses to the special questions, we find that most firms claim to be quite insensitive to decreases in interest rates, and only mildly more responsive to interest rate increases.

The IMF weighs in

There was a time when support from the IMF meant something and indeed it does but the opposite of what it did in the past as we review its disastrous involvement in the economic depression inflicted on Greece. It is in such a light we should review this.

A negative policy rate makes sense……….What has been the track record of the ECB’s negative rate policy—also adopted by other central banks, notably in Japan and Switzerland—after two years? Our paper finds that, so far, it has been successful.

However if you read the detail it has words like “should” and “intended”  and it has “contributed to a modest credit expansion” .Nowhere does it outright say it has boosted the real economy. Indeed as we move on from the initial hype I notice this.

However, there are unique challenges to negative rates in the euro area.

in essence the analysis is mostly about the banks ( The Precious) and after telling us why they should be lending more it gives reasons why they might not!

Banks in these countries face reduced margins not just on new lending, but also on existing loans,

Surely if some is good then more is better?

Overall, the ECB has limited room for further substantial rate cuts without hurting the profitability of banks.

Apparently not.

suggesting that the benefits from a negative interest rate policy might diminish over time

So we find out quite a lot about the banks and very little at all about the real underlying economy. Perhaps IMF researchers should get out more!

Pension Funds

This has been a theme on here for several years now because longer-term business models work increasingly poorly as interest-rates fall before not working at all in a world of negative interest-rates and yields. The Financial Times has now caught up.

The accelerating collapse of yields has widened already substantial gaps in many large pension funds, which use the rates to estimate how much additional funding they will need to meet benefit payments.

This is in one way a particular UK issue but illustrates also a much wider trend. We are back to when Andy Z posted the pensions illustration with one of the rates of return being -3%! What will we do when all of the rates of return have a minus sign? You have £100 now and by investing it for 20 years you can make it £50…..


The Ivory Tower theory is that lower interest-rates discourage saving. This may be true for some but certainly not everyone as the Wall Street Journal highlighted earlier this week.

Lasse Bohman, a 63-year old newsstand worker from Stockholm, said the concept of negative interest rates is “weird” and makes him want to save more for retirement rather than spend. “I am just going to keep on putting money in the bank,” he says, or “put it under the mattress at home.”

In general terms the problem is summed up here.

Some economists now believe negative rates can have an unintended psychological effect by communicating fear over the growth outlook and the central bank’s ability to manage it.

Yes I do. Especially if this story develops.

Word of the day. ‘STRAFZINS’! First German bank to charge negative interest rate to private clients ( h/t @jsblokland )


As the credit crunch has unfolded so many have told us that lower interest-rates will fix the problem. Yet each promise has turned to dust otherwise we would not be where we are and I would like to illustrate this with a tweet I sent out earlier.

If the world economy is doing as well as we are told why is everybody cutting interest-rates?!

Now we have an environment which increasingly includes negative interest-rates. Is there any cure in medicine which requires apparently endless ever higher doses or does that not look more like an addiction cycle? Frankly it looks like what was once described as pushing on a string.

Meanwhile Governor Carney may well be on his way to pushing the UK deeper into this so far bottomless pit. We are regularly seeing members of the Bank of England in the media using Open Mouth Operations to talk down the value of the UK Pound which will put upwards pressure on inflation. Thus with yields now so low the UK will be heading towards the most negative real yields of the major economies all from a man who claims “I’m not a fan of negative interest-rates.”

His Blockbuster looks like this.

Does anyone know the way, did we hear someone say
(We just haven’t got a clue what to do)
Does anyone know the way, there’s got to be a way

Me on Tip TV Finance




26 thoughts on “The economic problems created by negative interest-rates and yields

  1. Negative rates, any smart bond vigilante should be selling high and shorting. But this market isn’t trustworthy when CBs are playing outside trading norms.

    • Hi ExpatInBG

      I have seen some call it the “greater fool” theory where you end up hoping exactly that will emerge! Meanwhile the whole system gets distorted and what are considered market prices ( and hence signals) are simply not that.

      I remember in the past that Bulgaria had some higher interest-rates for savings etc, have they now gone?

    • Governments get free QE and can keep spending more than they collect in tax. Without this they’d need unpopular cuts and tax increases. Banks however, will charge a margin over whatever rate the CBs decree.

      • “Governments get free QE and can keep spending more than they collect in tax.”

        indeed but it seems to cover just current account spending and not major projects ( PFI ) or anything that might get a return ….

        or am I missing something ?

        ( ok they can get elected for now and when it all blows up the retired pollies can scoff that it was alright in their day…. )


  2. Hi

    It seams as if the central bankers have not relised that you pump money in at one source it just disappears else where I.e pension funds. what does this mean for investment if firms are filling gaps in pensions

  3. In the real economy interest rates and what companies pay to borrow is very seldom a factor in deciding to invest in a new project, product development or to enter a new market. I have instigated many such ‘investments’ over the years varying from a few hundred thousand pounds for new equipment up to many millions for the building of new factories or the launch of new product lines. The interest rate was never a factor as projects had to demonstrate a far greater return than a few percent here or there. Speculators probably do take minor interest rate movements into account and I can see how it might make a difference to them but it begs the question – who do central banks work for?

    What we did not like in our long range planning was currency volatility and pronouncements by politicians and central banks that effect consumer confidence. Boring was good! There is definitely a tendency to overreact to slight problems these days and that causes instability which is what companies hate. Central banks need to retreat once again to the shadows they used to live in and return to something that used to pass for normality.

    • “but it begs the question – who do central banks work for?”

      from your own observations it isnt us is it?

      more like a tool in warfare comes to mind


  4. I can’t see final salary pension schemes in the private sector lasting much longer. I see that Royal Mail have announced their one as ‘unaffordable’ quoting ‘a deterioration in financial market conditions’. Quite why they don’t mention the problem of the current interest rate environment is anyone’s guess but I suspect it is not politically correct to criticise the BOE.

  5. Bank controls next , eh , Shaun?

    when negative rates hit the high street it will be for savers , not borrowers

    unless its HMG thats the borrow of course

    did anyone slip Carney the memo about the BoJ and the last 20 years?


    • Hi Forbin

      It would appear that Japan is a place far far away about which the Bank of England knows little just like Czechoslovakia was claimed to be in the 1930s. Meanwhile the oil price has had a strong day ( Brent Crude nearing US $46 ) which is not good with the UK Pound £ so weak.

  6. You would have thought that by now the central banks would have come to the conclusion that their policies aren’t working but it appears that that is too much to expect.

    All these policies increase liquidity but we’ve had liquidity for years; what we haven’t had is the demand for investment and what we have had has gone into share buybacks and real estate.

    How on earth they expect negative rates to be tolerated at the retail level? The only way will be to ban cash and that will be seen for what it is: a serious infringement of civil liberties.

    The only consolation of this is that the more idiotic things get the nearer we are to the end game.

    • Bob J, your last comment is so prescient. I voted Brexit to bring things along a little and it has. Forced the BoE to do something it would have dithered for another 3 years or more. We are far closer to a reset but not there yet. 🙂

  7. You better beware, you better take care

    He’ll come from behind, you go out of your mind
    You’d better not go, you’d never know what you’ll find

    You look in his eyes, don’t be surprised
    If you don’t know what’s going on behind his disguise
    Nobody knows where Buster goes
    He’ll steal your woman out from under your nose

    He’s gotta be caught, he’s gotta be taught
    ‘Cos he’s more evil than anyone here ever thought

    I always preferred Sham 69’s cover version but anyway, looked at like that, Mr Carney seems quite a sinister subversive really. He certainly has been to me, just received an e mail from my Building Society part of which is replicated below:

    “‘Im writing to let you know that following the recent decrease in the Bank of England Base Rate on 4 August 2016, we’ve reviewed the interest rates paid on our savings accounts. I can confirm that from 1 September 2016 the variable interest rate on your account will also decrease. The table below confirms both the current and the new variable interest rates.

    Current rates
    £1 plus
    Annual AER/Gross p.a.*
    Monthly AER

    Monthly Gross p.a.


    New rates from 1 September 2016
    £1 plus
    Annual AER/Gross p.a.
    Monthly AER

    Monthly Gross p.a.


    I note that whilst the BOE rate was cut by 0.25% my savings rate has been cut by 0.35%…….

  8. Shaun,
    I am glad that you are giving this the coverage it deserves. Carney has gone from a MSM post-Brexit hero last week to a person derided by the ever growing Financially asute rational thinkers. Today there was an FT article “fears for pensions as gilt yields turn negative”. The recommended comments are a sight to behold. It just goes to show that other people are pointing out the flaws and very openly.
    A mirage this may not be… Paul

    • If they’re paying so much that the bond holder ostensibly is paying interest to them then the loss is recorded in the BOE accounting system when the bond is redeemed against the Treasury. The “loss” would then serve to reduce the BOE’s reserves, so it’s a paper or rather electronic exercise.

      It should be borne in mind that all the while the Bank holds the bond it also receives coupon from the Treasury (an incoming), thus swelling it’s reserves. In tehend of the day the total coupon received may exceed the “loss” on the bond when it is redeemed against the Treasury or not, you won’t know until the redemption date is reached.

      If the final result is a loss the BOE’s reserves are reduced, if a profit is realised the BOE’s reserves increase. This won’t be a profit/loss exercise in the usual sense as CB’s can’t go bust as they can issue as much currency as they like to shore up reserves but the extra money in the system can end up causing inflation if money velocity gets too high. Then again they can simply reduce money supply if that happens. .

  9. Hi Shaun,

    It has been a while since my last comment. Rest assured I read your blog every day.

    First of all our Sevens team does not equate to our 15s. It is a recent thing calling them the All Black Sevens. Congratulations to Fiji winning the gold. Their first ever Olympic medal!

    I must congratulate your team on beating the Ozzies three nil in Oz however we have been doing that for a number of years. NZ has held the Bledisloe Cup since 2003. NZ has held it a total of 43 times to Ozzies 12 since it stated in the 1930s.

    I note your comment regarding our Governor of the RDNZ. See attached link. I would be very interested in your comments.



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