Negative interest rates are the drama they seem

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 Posen

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.

Negative interest-rates

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”.

Yes Minister

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.


15 thoughts on “Negative interest rates are the drama they seem

  1. most savers who tried looking for alternatives found to their dismay that they could not find any

    put money into investment management ?

    right so we couldn’t get joe public to spend spend spend , so we will

    1, BIRP “tax” the savings

    so we can:-

    2, force them into buying precious metals

    3, force them into the market

    4, force them buy assets such as houses

    results in

    less income to spend on goods and services.

    and more costly to finance purchases of goods and services by borrowing

    and one more thing

    WHY do we need it if the economy is so bloody good ?


    PS: Oil will push up inflation next year , popcorn might follow

    but we’re all in it together to save the Dammed BANKS again..

    have a seat on the sofa….

    PPS : 375Billion and 4.5% interest drop achieved nothing ? ( another 80billion and 0.25% in a drop in the ocean …..) so if they ‘re right …..

    ….then 500billion QE and -4.5% rates will do what ?

        • aye but do you think they will listen ?

          I ‘d put money on them trying it out just after monitary controls – ie banning £20 and £50 pound notes ( because terrorists use them )

          interesting times


        • Forbin, the rich stash cash to avoid tax; it’ll never be banned.
          As soon as negative interest rates are introduced at a meaningful rate for ordinary folk like me (0.5-1%), there will be a run on the banks the likes of which you have never seen.

  2. Here’s a question for you. Have just been sent pieces from Richard Duncan and Richard Koo both effectively saying the same thing; all the debt that has been bought by central banks has in effect been ‘cancelled’. This means governments have much less debt than commonly assumed and can therefore go out on a massive debt funded spending spree. Sounds too good to be true that a central bank can just magic away all the debt. What do you think?

    • Hi Ian

      I think that there are several issues here. Firstly thanks for the link you sent me on Twitter to the Richard Duncan article where I note he shifts from “cancelled” in the title to “effectively cancelled” in his post. For those who have not seen it here is the link.

      This is an opinion piece masquerading as fact in my view.

      Firstly UK Gilts are issued by the DMO on behalf of HM Treasury so if anyone would cancel them it would be the Treasury.

      “Before the end of each financial year HM Treasury sets an annual financing remit for the Debt Management Office for the following financial year.”

      Also as Gilts owned by the Bank of England that have matured have then been switched to longer maturities in an Operation Twist style fashion and more than a few opportunities to cancel them have been missed, of the order of £50/60 billion if my memory serves me right.

      It is a long way to 2068 ( our longest dated Gilt) and policies might change on the way as canceling the Gilts would mean a permanent money supply increase that would be an issue in an inflationary episode.

      However are we being warmed up for some fiscal stimuli? Yep it feels like that to me as well.

    • Ian, I just read the Ian Duncan piece. He is clearly just trying to make money and thinks $500 pa is excellent value!!

      He hasn’t a clue how money supply works and his allegation that the BOE and ECB etc are “effectively cancelling $500 billion per quarter” is flat wrong!!

      They are doing a combination of rolling over old debt and printing new currency to finance it along with extra currency to buy the new issuance they are creating thus increasing money supply.

      The man is CLUELESS!!

  3. Great blog, Shaun, as always.
    Some of your readers may be interested in the attached Canadian perspective on negative interest rates:
    Despite the negative (no pun intended) attitude of Louis-Philippe Rochon and other Canadian economists towards negative interest rates, if they come to any of the G-7 countries that still don’t have them they will likely come to Canada before they come to the UK or the US. Carney has forsworn them, Yellen has said that they are only a last resort, but Poloz made headlines when he added them to the Bank of Canada toolkit. StatCan will announce a decline in real GDP for 2015Q2 on Friday, and although it is unlikely, it is at least possible that Canada is in a recession as we speak. If we do go into recession, I suspect that Governor Poloz will take the overnight rate negative. He seems to be programmed to drag our loonie down as far as he possibly can.

    • Sorry, of course the real GDP update on Friday will be for 2016Q2 and for the month of June for the GDP by industry estimates. More haste, less speed.

      • Hi Andrew and thank you.

        After writing of the demise of Sir Anthony Jay I cannot resist using the words he put in the mouth of Jim Hacker when I read “Carney has forsworn”

        Never believe anything until it is officially denied!

        As to Canada there were rumours a while ago about a move to negative interest-rates but that went quiet. But as you say the Bank of Canada is unlikely to hang around if more signs of a slowdown emerge. Also thanks for the link where they assume you would not get a 0.5% cut or as central bankers like to stop short of 0% at first a 0.4% cut. Crazy I know but….

        There are more and more stories doing the round here about the Vancouver housing market. How is it being reported inside Canada?

  4. Shaun, thank you for your interest. Here are a couple of links on that subject:
    I think the most trustworthy house price indicator for major Canadian cities is the Teranet National Bank House Price Index, closely modelled in its methodology on the US Case-Shiller indices. For July 2016, the annual inflation rate for Vancouver was 24.7%, up from 23.4% in June. Of the 11 cities in the Teranet National Bank composite, three others also show double-digit inflation rates: Victoria, Hamilton and Toronto (in descending order by inflation rate). Victoria, the BC capital, had home prices rise by 14.7% in July, up from 12.5% in June. The BC economy is out-performing all other Canadian provinces and this partly accounts for the hot Vancouver and Victoria house markets.
    The 15% tax on foreign homebuyers just brought in by the BC government only on homes purchased in the Greater Vancouver Area took effect at the beginning of this month. There is a lot of speculation that the tax will lead foreign buyers to switch to other markets, pumping up their house prices. The most obvious city would beVictoria, but they might also look at Toronto, Hamilton or even Ottawa (delightful thought that).
    For a long time there were no solid data on foreign resident purchases of BC real estate , and people who blamed the house price increases on foreign buyers were sometimes pilloried as xenophobic or racist. Now there are some solid numbers it is obvious that the share of foreign buyers in the Greater Vancouver Area has been substantial, better than one in ten; in Victoria, it has been much less, but still about one in thirty.

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