Inside the world of negative interest-rates

A feature of modern economic life is that interest-rates were first cut as close to zero as central banks thought they could and then in more than few cases they went below zero giving us the acronym NIRP for Negative Interest-Rate Policy. There was the implication that such a state of affairs would be temporary in that the medicine would work and that interest-rates would then be raised. For example I have put on here before the charts that show that the Riksbank of Sweden has been forecasting interest-rate increases for years whereas the reality was that it either cut or did nothing. Ironically it changed tack a little last December just in time for the world economy to turn down!

As to all this being temporary let me hand you over to ECB President Mario Draghi on the day he cut the Deposit Rate to -0.1% back in June 2014.

Draghi: On the first question, I would say that for all the practical purposes, we have reached the lower bound. However, this doesn’t exclude some little technical adjustments and which could lead to some lower interest rates in one or the other or both parts of the corridor. But from all practical purposes, I would consider having reached the lower bound today.

This has been a feature of central banker speak where they discuss a “lower bound” as if this type of economics is a science. The reality is that the nearest the “lower bound” has got to being a status quo has been this.

Get down
Get down deeper and down
Down down deeper and down
Down down deeper and down

If we let him have the move to -0.2% as a technical adjustment we have to face up to the fact that it is now -0.4% and about to go to -0.5/6%. This has consequences as for example over the past month or so the amount deposited at the ECB at such a rate is 1.86 trillion Euros. So this is a drain on the banking system and therefore wider economic life as well as being a nice little earner for the ECB.

The “lower bound” theme has been the same in the UK as Bank of England Governor Carney asserted it was 0.5% but later decided it was 0.1%. Or you could look at the US Federal Reserve defined “normal” interest-rates as being somewhere above 3% then changed its mind and started cutting them. The truth is that the new normal is that when a central bank raises interest-rates it soon turns tail and starts cutting them.


The Swiss are at the cutting edge of negative interest-rates and it was ECB policy which was the supermassive black hole that sucked them into it. In terms of timing the June 2014 move by the ECB was followed by this in January 2015.

The Swiss National Bank (SNB) is discontinuing the minimum exchange rate of CHF 1.20 per euro. At the same time, it is lowering the interest rate on sight deposit account balances that exceed a given exemption threshold by 0.5 percentage points, to −0.75%.

For those who have not followed this saga there was an enormous amount of borrowing in Swiss Francs pre credit crunch because interest-rates were there. When the credit crunch hit institutional investors raced to reverse such positions which made the Swiss Franc soar which had the side-effect of crippling those who in eastern Europe who had taken out such mortgages. The SNB found itself like General Custer at Little Big Horn as the ECB version of Indians arrived and gave events another push.

Again there was an implication that this would be temporary until matters calmed down but the reality has been very different. Or to put it another way in central banker speak the word temporary now means permanent.

The signal we now have has been provided by two developments this morning. Let me start with the Swiss one.

Domestic sight deposits CHF 475.3 bn vs CHF 469.0 bn prior…………. Once again, a notable rise in the sight deposits data and that continues to suggest that the SNB is stepping in to smooth the appreciation in the franc over the past few weeks.

In case you are wondering why those numbers are looked at the SNB only occassionally declares it has intervened in foreign exchange markets and does so via other central banks and the BIS. So to find out we have to look at other numbers and thank you to Bank Pictet for this estimate.

In total, sight deposits have increased by CHF 9.8bn in the last 4 weeks, and CHF 10.3bn in the last 5 weeks.

So like The Terminator the SNB is back. Why? The Swiss Franc has been strengthening again and went through 1.09 versus the Euro. Whereas on the 23rd of April last year I noted that Reuters were reporting this.

The Swiss franc fell to a three-year low of 1.20 against the euro on Thursday as a revival in risk appetite encouraged investors to use it to buy higher yielding assets elsewhere, betting on loose monetary policy keeping the currency weak.

There were still problems though as I pointed out to a background elsewhere of something of a chorus saying the SNB had triumphed..

Any economic slow down would start currently with interest-rates at -0.75% posing the question of what would happen next?

Well we have an economic slow down and we expect the ECB to cut again which according to Bank Pictet will have this consequence.

SNB officials have emphasized the importance of the interest rate differential (mainly versus the euro area) for the exchange rate and thus the policy outlook. The SNB’s policy rate differential with the ECB’s deposit facility rate now stands at 35bp, below the 50bp in 2015 when the SNB lowered its interest rates to -0.75%.

To be fair to Bank Pictet that was from the end of July and so could not factor in the statements from Bank of Finland Governor Ollie Rehn on Friday about “overshooting” market expectations about the ECB move. So the statement below has got more likely.

In that event, should the CHF come under
excessive upward pressure, our best guess is that the SNB would cut the interest rate on sight deposits by 25 bps, bringing it down to -1.0%.


Thus we are facing a new frontier should the Swiss find they have to cut to -1% interest-rates or as the SNB might put it.

Yes we’re gonna have a wingding
A summer smoker underground
It’s just a dugout that my dad built
In case the reds decide to push the button down
We’ve got provisions and lots of beer
The key word is survival on the new frontier. ( Donald Fagen )

This will mean that the pressure for more of this will build.

UBS, the world’s largest wealth manager, told its ultra-wealthy clients on Tuesday that it would introduce an annual 0.6% charge on cash savings of more than €500,000 (£461,000). The fee, to be introduced in November, rises to 0.75% on savings of more than 2m Swiss francs (£1.7m). ( The Guardian ).

In some ways the economic situation has already adjusted to this as the Swiss ten-year bond yield is -1.1% and the thirty-year is -0.6%. Imagine the impact of this on long-term contracts such as pensions. Give me 100.000 Swiss Francs and I will give you 84,000 back in thirty-years, who would do that?

Meanwhile here is something to make UK readers very nervous.

BoE Gov Carney: At This Stage We Do Not See Negative Rates As An Option In The UK ( @LiveSquawk )


20 thoughts on “Inside the world of negative interest-rates

  1. Hi Shaun, a very pertinent blog today as I spent the weekend wondering what to do with my cash. I resolved to turn it all into Gold sovereigns but only once we get some dollar Xchange back, more like 1.30 or 1.34 because the currency depreciation has made Gold expensive for English people.

    I think I follow your last riposte: ” BoE Gov Carney: At This Stage We Do Not See Negative Rates As An Option In The UK ” the unreliable boyfriend will do exactly the opposite of what he says. The real question is whether retail deposits drop to zero or not. Tridodos bank wrote to me saying they will not honour their 1.1% and are dropping it to 0.8%, against their plans and afford me a chance to relocate savings without a transfer charge.

    I worry more for the markets and in turn the GF system, if we go hard Brexit and we get an HK Governance implosion in October, the two together could tip this debt ponzi over the edge. It is obvious to me now that “Jackson Hole” has no solutions, only more debt and financial represssion. Maybe they will propose a global digital currency but I know that I will be the last given opportunity to convert my cash into it (when it is fully depreciated).

    All to protect the grey-haired boomers and those leaders who are the same, to keep the assets and wealth in the last age cohort for another few years, and repress the working age producers. I wonder at what point the youth wiill say, well er…. NO, if you want your bottoms wiped it will be £30.00 per hour minimum hourly rate, I think vehicle garages charge £65.00 per hour labour.

    Anyone else think this October coudl be the watershed moment?

    Paul C.

    • Hmm there are a number of issues with regards to todays blog:

      1. Carney stated on the 1st August he discounted negative rates at that time! Well a couple of weeks has transpired and things have deteriorated word wide since then so those words are quite meaningless to me now!

      2. But taking account of what he said it makes me wonder whether its the same old bull one talks up rises and less cuts is just propaganda to talk up the £ it may be down today but had a minor rally from its low point last week. A low £ affects import prices so will affect inflation and the UK doesn’t want that.

      3. The race is on to lower rates and cut further and this is despite claims by other countries they saw no lowering and all that said if the BREXIT affect worsens I think the BOE will go negative whatever Carney has said and he is due to go soon in any event.

      4. To answer paul above “NO, if you want your bottoms wiped it will be £30.00 per hour minimum hourly rate,” Well I have a friend who needs social care at home and have been quoted £22 per hour from a care company and £3 driving from the unit to her home per mile. So there and back the traveling time is about 5 miles x 3= £15 +£22 care time= £37 ! Yes £32 and that could be for just keeping someone company in their own home talking to them!

      5. So how will gilts affect company pension schemes now, particularly if they are in deficit? Presumably they will have make up more of the deficit not certain what the average rate they allow for maybe Shaun or someone else explain, but it looks to me like the pension industry is racking up serious problems on gilts almost flat or going negative.

      6. I do not believe politicians, and bankers at the moment and take the press with a pinch of salt they are biased one way or the other.

      7. All I known is my gut feeling tells me the world is in a far worse state than before the last financial crisis at the moment and who knows where this is going to end up.

      8.Lastly interestingly I missed the obvious on Gold prices, there are lots of adverts now on Sky pumping Gold, however with the £ low if the £ reverses which is possible if the UK performs better than forecast the price of Gold paying by the £ now could turn out to be a bad investment.

  2. The lower bound for central bank deposit rates is at whatever rate commercial banks would convert their CB reserves in excess of what they expect to require to settle day to day payments into banknotes. The cost of secure, insured storage is estimated to be in the region of 0.75% or above, so absent any other changes to the monetary system, expect CB deposit rates not to go too far below this level.

    For various reasons the lower bound for retail customer deposits appears to be stuck at zero. Retail customers appear to be less concerned about the storage of banknotes and banks don’t want to be seen as being the first mover in cutting customer deposit rates below zero.

    If it weren’t for the availability of banknotes, there would be no lower bound to CB deposit rates and to customer deposit rates offered by banks. In order to bring the desires of would be borrowers and would be savers into equilibrium, rates could well need to be taken as far negative as they have been positive in the past.

    The only thing stopping this is the availability of banknotes – financial instruments that have always paid a fixed 0% return.

    • Bob,

      re: “bring the desires of would be borrowers and would be savers into equilibrium, rates could well need to be taken as far negative as they have been positive in the past. ”

      I guess in your ivory tower you haven’t considered WHAT high street negative deposit rates will do to the monetary system when Joe Public sees it.

      all that BUMF on savers equilibrium with borrowers would be seen to be the garbage that it is with today’s current policies . No amount of head scratching and quoting verbatim Econ 101 by the economist priests and their sycophants will help.

      We do know what happens when the public cottons onto and looses faith in their governments money system, they use something else ( in Zimbabwe case the citizens used Dollars,Euros and good old fashioned barter).

      The existence of banknotes does crimp the thinking of the CB and their chums but at about 3% of total money available I would posit they would be thinking of caps on ATM and the like, such as re-issue and outlawing notes.

      Monetary policy is now limited, leaving fiscal.


      • If it were possible to have -ve rates on money and a few people were persuaded not to hold money because of that, then -ve rates on money would have done their job

        • Hello Bob,

          If by money you mean banknotes, yes it is possible to have -ve rates on them. You re-issue with a higher denomination and with draw the old ones, a la Zimbabwe and countless others .

          As for the other forms of “cash” then you can think of ways to make people spend it , even with a negative over night rate for any money left in the current account ( for the public) . Same for public saving accounts , doesn’t have to be much , about -0.01% per night would do.

          As for that form of saving called Pensions……..

          the result would be spend, spend , spend. Doesn’t take much imagination to see people will not use the money issued by the CB and go for something else. They will be reminded of 1930′ s Germany and Zimbabwe .

          Even using electronic forms as Carney indicated is fraught with problems…..

          “Harare has conceded that its electronic “zollars” are worth 60 percent less than it had claimed. Yet black market valuations imply the currency is still overvalued”

          (Reuters Feb 2019)

      • Forbin, I ‘think’ its because this weekend just gone was the busiest in the French holiday season, but all the ATMs around here ( Tarn, not exactly overwhelmed by tourists) were giving out a maximum of 40 Euros. It was quite a nasty foretaste of things to come.
        Now it might have been just expediency because of anticipated demand, or even that the guys reloading the machines were on hols, but…………!

  3. Hello Shaun,

    re: “Give me 100.000 Swiss Francs and I will give you 84,000 back in thirty-years, who would do that?”

    if you thought you’d get a Greek haircut you might consider that a bargain !


    • Yes is is the ‘return of their money’ rather than the ‘return on their money’ that is beginning to preoccupy people today. Any country that is seen as geopolitically stable is a good bet.

    • forbin,
      “re: “Give me 100.000 Swiss Francs and I will give you 84,000 back in thirty-years, who would do that?”

      On balance no one but if the world suffers massive deflation it may be a sound bet!

  4. I saw over the weekend Denmark are now offering mortgages with negative interest rates… wouldn’t mind an interest only mortgage there.

    And as a separate note, I was speaking to our IT supplier on Friday, and he told me of another customer who had authorised £150k payment to a fraudlent bank account after their email was hacked and account numbers changed.

    But clearly as far as the central banks are concerned, all the illegal activities are taking place via high denomination cash bills and so they must be banned.

    What a mad mad world…..

    • jimbob

      Shaun mentioned all this last week Denmark offering negative interest rates on mortgages, and presumably paying the borrower.

      Its seems had to believe I wonder whether there is a catch somewhere in the terms of the agreement like an upfront fee for setting them up to cover themselves?

      I don’t know whether Shaun has looked into the schemes further but I suspect the deals on negative interest rates are more complex than has been suggested.

      • This was first reported by the FT a week or ago and has been widely disseminated from there, but is wrong.

        A DKK MBS was issued with a negative yield, but this is very different to mortgage borrowers borrowing at a -ve rate. All mortgage borrowing in Denmark still costs the borrower over the life of the loan.

        If at any point in the future Danish mortgage lenders do offer a mortgage product with a negative cost to the borrower, it is unlikely that the borrower will receive monthly payments from the lender. Instead his outstanding balance would be reduced slightly each month

        • Robert,

          Thanks for that I had a gut feeling it wasn’t as simple as first reported and it wouldn’t be a free ride for the borrower.

  5. Hi Shaun

    This talk of NIRP has the air of a last desperate throw of the dice. If it hasn’t worked to zero why would it work below zero? It makes no sense at all. All it does is to highlight how powerless the central banks are.

    In this situation at the ZLB fiscal not monetary policy should be at the fore to underpin economic activity. But of course doing things like spending money on improving infrastructure may be all very well and rational but it still doesn’t address the real issue: preventing the Ponzi from collapsing. The idiocy of this is that we’re edging towards the point where the only way to keep the show on the road is by what amounts to outright confiscation from savers. I wonder if anyone has considered that savers might not be very pleased about this.

    Low rates have already decimated pensions and NIRP will finish the job. When those rubbing their hands over how low their mortgage payments are turn their thoughts to retirement they will not be best pleased.

    i think it’s inevitable this will end in tears.

    • Hello Bob,

      re “If it hasn’t worked to zero why would it work below zero?”

      it would make a debt reset more possible to sell to the public.

      interesting times ! ( in many ways 😉 )


  6. Great blog and podcast as usual, Shaun. Thank you for responding to my question about seasonal goods in the inflation measure. No need to apologize for not asking about how the ersatz seasonal formula used in the UK consumer price indices came to be recommended by the 1993 RPIAC. I know John Astin, who was a member of that Committee, and will ask him about that.
    Switching to cauliflower prices, Arthur Barnett, of our RPI CPI User Group, seems to share your opinion. He wrote: “Crop failures in horticulture are a regular occurrence so it may be a bit of a false alarm. What tends to happen is that it is normally class 1 products that get sold directly to the consumer and the class 2 etc go into the food processing industry. If there is a shortage suddenly class 2 products magically appear on the supermarket shelves.” This does imply though that there would be a hidden price increase in terms of a reduction in the quality of the produce sold, which the ONS might or might not correct for.
    Cauliflower, according to the dysfunctional terminology of the ILO CPI manual, is just a weakly seasonal good. Even if its price spike this year turns out to be a false alarm, if global warming is real there are likely to be price spikes for such so-called weakly seasonal goods due to drought conditions more commonly in the future than in the past. And people really should question whether a price spike in an in-season month should not be weighted more heavily than in an off-season month.

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