The subject of negative interest-rates is one which has been chronicled on here for some years now. I predicted that they would come to the Euro area and it is no great surprise that they reached Japan. Indeed the force of the negative rate tsunami is so great that there are flickerings of them reaching the UK as well. From Bloomberg on Monday.
Royal Bank of Scotland (RBS) announced it will charge negative rates to trading clients for collateral deposits.
A technical move for some business customers but it is a toe in the water nonetheless and reminds us that RBS promised/threatened such a thing before the Brexit referendum. It is always RBS isn’t it? No wonder the Financial Times is reporting its efforts to return to the private-sector are being harmed by “legacy” issues. That is one of the euphemisms of the year as we note its share price. Also there is food for thought in negative interest-rates being introduced by what is in effect a state-owned bank.
Adam has written an opinion piece in the Financial Times saying that negative interest-rates are not a drama. He used to be at the Bank of England until he resigned after this happened. From The Times in March 2011.
Adam Posen says he will leave the Bank’s rate-setting panel if his prediction that inflation will fall to 1.5 per cent next year is proved wrong.
It was and he did which on Wikipaedia has somehow metamorphosed into this.
(he) accurately forecast global inflation developments.
Savers facing the prospect of negative interest-rates may find their blood boiling in response to the opening salvo.
This is too much fuss over just another policy instrument.
Perhaps they are just something in a place far away which can be ignored, although of course it was only Monday that I pointed out another referral to them by the US Federal Reserve’s Vice-Chair Stanley Fischer. Also Adam tells us this.
Negative rates will prove less universally applicable but have also proved predictable and useful in impact.
Actually that is simply untrue. For example how can you say they were “predictable” in Japan when Bank of Japan Governor Kuroda denied any such intention only 8 days before? Also you may note that each time they are introduced there are tweaks to the rules as to how they apply – invariably to protect the banking sector – which fits poorly with the “predictable” claim.
Adam continues with a critique of his own time at the Bank of England although of course he does not put it like that.
The first error is believing that the majority of financial decisions will respond significantly to any shifts in government borrowing costs.
Adam was perhaps the most enthusiastic advocate of QE – whose aim is to lower government borrowing costs – at the Bank of England when he was there,whereas now he seems to have seen the light that it did not achieve much if anything at all.
He suggests that we should note economic differences between countries and here he does have a point.
Sadly, any regard for such structural differences remains absent from the hyped concerns over negative rates.
Except as ever it is presented in a format that implies that savers in some counties are somehow at fault.
Economies such as Germany and Italy, where a large share of savers hold their assets in simple bank deposits and much of the corporate sector receives its financing from bank loans, will benefit less from negative rates. If anything they will suffer the direct costs.
So negative interest-rates would be a drama in Italy and Germany. Ooops! Because of course they are already there and it was only 10 days or so ago that Raiffeisen Gmund am Tegernsee announced plans to apply them to larger depositors in Bavaria. In fact in Adam’s world things would be much better if they were more like Americans.
By contrast, in economies, such as the US and Australia, where savers and companies are more flexibly financed, borrowers will move out of banks and into other forms of saving and financing.
Do you note how in the latter part of the sentence savers seem to have vanished? Also how will borrowers move into other forms of saving? I would imagine Adam means that savers will but there is a sweeping assumption here which is that they will do what he wants! What if they are happy where they are and do not want to take what they consider to be higher risks? Apparently savers in Germany and Italy have few other options which rather contradicts my financial career as at Deutsche Bank I was often dealing on behalf of such people.
Where savers have more options they tend to have more diversified assets, and so will be less resistant to negative rates.
Anyway there is a clear message of “up yours” to savers here.
But if central banks protect savers from the impact of the negative rate, they have no incentive to move funds and the overall impact of the policy will be minimal.
Also I am intrigued by the international equivalent of saver Joe Sixpack actually doing this.
and less subject to exit into global markets by dissatisfied savers.
Indeed there is the suggestion that it is a better policy for the US and UK.
Taking these oft-ignored factors into account, the BoE and even more so the Fed should be less hesitant. In the US and UK, households have more options and display more flexibility for their savings than in Japan or much of the eurozone.
There is an excellent response to this from Hamiltonian in the comments.
This nonsense is astounding. My family are financially savvy, but to suggest that those with a proper job to do have the time to find the best way to exploit interest rate differentials, exchange rates, hedging costs, bond returns and all this in the context of varying inflation is way, way, way out of the real world.
There is something of a rewriting of history here as Adam tells us this about QE.
it worked pretty much as expected in reducing interest-rate spreads, encouraging riskier asset purchases and adjusting the currency.
It was a shame that he was not more open at the time about the plan to boost equity and house prices but as we note a soaring Yen and a rising Euro I wonder how “adjusting the currency” is going?
Let me put this another way which is that negative interest-rates have the features of a tax. The St.Louis Fed. put it like this.
But a negative interest rate is just a tax on the banks’ reserves. The tax has to be borne by someone:
As central banks operate primarily to help the banking sector this poses a problem but there are two potential “cures”.
The banks can pass the tax onto depositors by paying a lower interest rate on deposits or charging them fees for holding the deposits. In either case, depositors have less income to spend on goods and services.
Or like we have seen in Sweden.
The bank can pass the tax onto borrowers by charging them a higher interest rate on a loan or higher fees for processing the loan. In either case, it is more costly to finance purchases of goods and services by borrowing.
Or as it is the banking sector they could do both!
Let me leave you with the fact that the past policies suggested such as lower interest-rates and QE are not working so the cry goes up for “More,More,More”. Yet it is the same crew who suggested such policies who always want more “innovation”.
I am a great fan of this series and it is accordingly with great sadness that I note the passing of Sir Anthony Jay who was the co-author. It is as fresh now as it ever was.