What next for the world of negative interest-rates?

There were supposed to be two main general economic issues for 2017. The first was the return of inflation as the price of crude oil stopped being a strong disinflationary force. The second was that we would see a rise in interest-rates and bond yields as we saw an economic recovery combined with the aforementioned inflation. This was described as the “reflation” scenario and the financial trade based on it was to be short bonds. However we have seen a rise in inflation to above target in the UK and US and to just below it in the Euro area but the bond market and interest-rate move has been really rather different.

Negative Official Interest-Rates

Euro area

These are still around particularly in Europe where the main player is the European Central Bank. This plays out in three main areas as it has an official deposit rate of -0.4%, it also has its long-term refinancing operations where banks have been able to borrow out to the early 2020s at an interest-rate that can also be as low as -0.4% plus of course purchasing sovereign bonds at negative yields. So whilst the rate of monthly bond purchases has fallen to 60 billion Euros a month the envelope of negative interest-rates is still large in spite of the economic recovery described earlier this week by ECB President Draghi.

As a result, the euro area is now witnessing an increasingly solid recovery driven largely by a virtuous circle of employment and consumption, although underlying inflation pressures remain subdued. The convergence of credit conditions across countries has also contributed to the upswing becoming more broad-based across sectors and countries. Euro area GDP growth is currently 1.7%, and surveys point to continued resilience in the coming quarters.

Indeed the economic optimism was turned up another notch by the Markit PMI business surveys on Tuesday.

The PMI data indicate that eurozone growth remained impressively strong in May. Business activity is expanding at its fastest rate for six years so far in the second quarter, consistent with 0.6- 0.7% GDP growth. The consensus forecast of 0.4% second quarter growth could well prove overly pessimistic………

That is better than “resilience” I think.


This is one of the high fortresses of negative interest-rates as you can see from the latest announcement.

The Executive Board decided to extend the purchases of government bonds by SEK 15 billion during the second half of 2017 and to hold the repo rate unchanged at −0.50 per cent. The repo rate is now not expected to be raised until mid-2018, which is slightly later than in the previous forecast.

As you can see a move away from the world of negative interest-rates seems to have moved further into the distance rather than get nearer. If you look at the economic situation then you may quite reasonably wonder what is going on here?

Swedish economic activity is good and is expected to strengthen further over the next few years. Confidence indicators show that households and companies are optimistic and demand for exports is strong. The economic upturn means that the demand for labour is still strong.

We do not have the numbers for the first quarter but we do know that GDP ( Gross Domestic Product) increased by 1% in the last quarter of 2016. If you read the statement below then it gets ever harder to justify the current official interest-rate.

Rising mortgage debt is a serious threat to Sweden’s economy while regulators need to introduce tougher measures to strengthen banks against future shocks, the central bank said in its semi-annual stability report, published on Wednesday………Swedish house prices have doubled over the last decade. Apartment prices have tripled. Household debt levels – in relation to disposable income – are among the highest in Europe.


The Swiss National Bank feels trapped by the pressure on the Swiss Franc.

The Swiss franc is still significantly overvalued. The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market are necessary and appropriate to ease pressure on the Swiss franc. Negative interest has at least partially restored the traditional interest rate differential against other countries.

You may note that they are pointing the blame pretty much at the ECB and the Euro for the need to have an interest-rate of -0.75% ( strictly a range between -0.25% and -1.25%).


As you can see Denmark’s Nationalbank has not moved this year either.

Effective from 8 January 2016, Danmarks Nationalbank’s interest rate on certificates of deposit is increased by 0.10 percentage point to -0.65 per cent.

The 2016 move left it a little exposed when the ECB cut again later than year but it remains firmly in negative interest-rate territory.


Until now we have been looking at issues surrounding the Euro both geographically and economically but we need to go a lot further east to see the -0.1% interest-rate of the Bank of Japan. Added to that is its policy of bond purchases where it aims to keep the ten-year yield at approximately 0%. So there is no great sign of a change here either.


The United States

Here of course we have seen an effort to move interest-rates to a move positive level but so far we have not seen that much and it has not been followed by any of the other major central banks. Indeed one central bank which is normally synchronised with it is the Bank of England but it cut interest-rates and expanded its balance sheet last August so it has headed in the opposite direction this time around.

This theme has been reflected in the US bond market where we saw a rise in yields when President Trump was elected but I note now that not much has happened since. The ten-year Treasury Note now yields around 2.25% which is pretty much where it was back then. We did see a rise to above 2.6% but that faded away as events moved on. Even the prospect of a beginning of an unwinding of all of the bond holdings of the Federal Reserve does not seem to have had much impact. That seems extraordinarily sanguine to me but there are two further factors which are at play. One is that investors do not believe this will happen on any great scale and also that there is no rule book or indeed much experience of how bond markets behave when a central bank looks for the exit.

How much?

There was a time when we were regularly updated on the size of the negative yielding bond universe whereas that has faded but there is this from Fitch Ratings in early March.

Rising long-term sovereign bond yields across the eurozone contributed to a decline in outstanding negative yielding sovereign debt to $8.6 trillion as of March 1 from $9.1 trillion near year-end 2016.

The fall such as it was seemed to be in longer dated maturities.

The total of negative-yielding sovereign debt with remaining maturities of greater than seven years fell significantly to $0.5 trillion as of Mar. 1 from over $2.6 trillion on June 27 2016.

Since then German bond yields have moved only a little so the general picture looks not to be much different.


I wanted to point out today the fact that whilst it feels like the economic world has moved on in 2017 in fact the negative interest-rate and yield story has changed a lot less than we might have thought. It has fallen out of the media spotlight and perceptions but it has remained as a large iceberg floating around.

One of my themes has been that we will find out more about the economic effects of negative interest-rates as more time passes. Accordingly I noted this from VoxEU yesterday.

Banks throughout the Eurozone are reluctant to cut retail deposit rates below zero, wary of possible client reactions

That has remained true as time has passed and it seems ever clearer that the banking sector is afraid of a type of deposit flight should they offer less than 0% on ordinary retail savings. That distinguishes it from institutional or pension markets where as we have discussed before there have been lots of negative yields and interest-rates. Also if we look at average deposit rates there remain quite large differences in the circumstances.

For example, the average rate on Belgian deposits has dropped to 0.03%. If Belgians took their money across the border, they could get almost ten times that in the Netherlands (0.28%). In France even, rates average 0.43%.

If we move to household borrowing rates we see that there are much wider discrepancies as we wonder if at this level we can in fact call this one monetary policy?

The Finns borrow against 1.8%, the Irish pay 3.6%

Some of the differences are down to different preferences but as the Irish borrowing is more likely to be secured ( mortgages) you might reasonably expect them to be paying less. Oh and as a final point as we move to borrowing we note that rates are a fair distance from the official ones meaning that the banks yet again have a pretty solid margin in their favour, which is somewhat contrary to what we keep being told.

13 thoughts on “What next for the world of negative interest-rates?

  1. Banks throughout the Eurozone are reluctant to cut retail deposit rates below zero, wary of possible client reactions

    that why they need to ban cash – stop a bank run



    • Hi Forbin

      Yes they may well be setting a template with their plans for the 500 Euro note which we have discussed before on here. Also this is a factor in the boom in the price of Bitcoin which nudged over US $2700 yesterday. Mind you it has become a wild and volatile ride as we have seen US $2095 today before going back above US $2300 as I type this.

  2. Shaun
    Why is it that with negative interest rates and QE, we have seen no real inflation?
    I remember reading that an increase in the money supply leads to inflation
    Is this no longer true, or are we going to have massive inflation soon?

    • Global inflation has already started arriving and it’s on the way up. I expect increasing levels through year end and then elevated levels through end 2018 at least.

  3. I have to confess I have no idea how an economy can function with zero interest rates. I don’t know what effect policies will have and would hate to be an investment advisor right now. What I do know is that Larry Summers was right, if this isn’t the time to upgrade infrastructure when will it be? It would certainly show exactly how much slack there is in the economy.

    I have to worry about the UK’s current direction. Clamping down on immigration and child benefits in the face of a rapidly aging population seems like an economic recipe for disaster to me and I’m surprised the IFS haven’t brought it up.

    Speaking of which I have post up about them today https://bill40.wordpress.com/2017/05/26/the-ifs-are-jolly-cross-indeed they seem a bit inadequate at the moment.

    PS Good point you raise there Forbin.

    • Child benefits hardly make much difference when most young in Britain cannot afford shelter for themselves let alone a child.

      • A very fair point but it does discourage overall I think, some have one less and large families discouraged. It all adds up, though your point stands.

  4. With inflation above 3% in the U.K. and instant access accounts paying just over 0.5% saving money in a bank or building society is a tax on saving.
    The economic and monetary system requires to be restructured this used to occur every few decades however Breton Woods took place in 1944 and last till Nixon suspended the convertibility of gold into US dollars in 1971.
    Since then debt and currencies have expanded exponentially we are at a crisis point this cannot continue the US bet is doubling every 8 years this has been the casein economy 1981.
    Change is required the populations in western economies are being fleeced while a tiny percentage are seeing their wealth increase significantly.

  5. Hi Shaun, so, here’s my prediction, firstly Japan is a law unto itself so I’m not going there.

    The Fed is under increasing pressure to raise as the employment market looks tight and wage rises are increasing, but I expect a fall back in the US GDP growth about now due to narrow money growth collapsing late last year and into this (although it’s started bouncing back a bit very recently) which I think the Fed can see, which is why they’re hesitating. However, they have a new problem due to legislative changes around the operation of US money markets last year which raised lending costs and tightened bank credit supply. It looks to me like that tightening is coming to an end as less banks are still tightening their lending standards. If this is correct, which I will know in another 3 months then the Fed will raise again this year even in the face of collapsing narrow money supply (assuming the current bounce is a dead cat bounce).

    The ECB is waiting till after the German/Italian elections before raising. If the elections go the, er, “right” way then they will raise as all indicators are screaming RAISE right now.

    • Hi Noo2

      The Fed is looking rather lonely tight now. As to US growth I presume you mean a dip in the Atlanta Fed forecast for this quarter from the current 3.7% as opposed to the first quarters 1.2% ( both annualised)?

      As to the Euro area it is hard not to raise a wry smile at the “independent” central bank behaving exactly like the politicians would have done. Of course they have also managed policies which I doubt the politicians would have got away with.

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