The mad world of negative interest-rates is on the march

Yesterday as is his want the President of the United States Donald Trump focused attention on one of our credit crunch themes.

Just finished a very good & cordial meeting at the White House with Jay Powell of the Federal Reserve. Everything was discussed including interest rates, negative interest, low inflation, easing, Dollar strength & its effect on manufacturing, trade with China, E.U. & others, etc.

I guess he was at the 280 character limit so replaced negative interest-rates with just negative interest. In a way this is quite extraordinary as I recall debates in the earlier part of the credit crunch where people argued that it would be illegal for the US Federal Reserve to impose negative interest-rates. But the Donald does not seem bothered as we see him increasingly warm to a theme he established at the Economic Club of New York late last week.

“Remember we are actively competing with nations that openly cut interest rates so that many are now actually getting paid when they pay off their loan, known as negative interest. Who ever heard of such a thing?” He said. “Give me some of that. Give me some of that money. I want some of that money. Our Federal Reserve doesn’t let us do it.” ( Reuters )

That day the Chair of the US Federal Reserve Jerome Powell rejected the concept according to CNBC.

He also rejected the idea that the Fed might one day consider negative interest rates like those in place across Europe.

The problem is that over the past year the 3 interest-rate cuts look much more driven by Trump than Powell.

Of course, there are contradictions.Why does the “best economy ever” need negative interest-rates for example? Or why a stock market which keeps hitting all-time highs needs them? But the subject keeps returning as we note yesterday’s words from the President of the Cleveland Fed.

Asked her view on negative interest rates, Mester told the audience that Europe’s use of them “is perhaps working better than I might have anticipated” but added she is not supportive of such an approach in the United States should there be a downturn.

Why say “working better” then reject the idea?  We have seen that path before.

The Euro area

As to working better then a deposit-rate of -0.5% and of course many bond yields in negative territory has seen the annual rate of economic growth fall to 1.1%. Also with the last two quarterly growth readings being only 0.2% it looks set to fall further.

So the idea of an economic boost being provided by them is struggling and relying on the counterfactual. But the catch is that such arguments are mostly made by those who think that the last interest-rate cut of 0.1% made any material difference. After all the previous interest-rate cuts that is simply amazing. Actually the moves will have different impacts across the Euro area as this from an ECB working paper points out.

A striking feature of the credit market in the euro area is the very large heterogeneity across countries in the granting of fixed versus adjustable rate mortgages.
FRMs are dominant in Belgium, France, Germany and the Netherlands, while ARMs are prevailing in Austria, Greece, Italy, Portugal and Spain (ECB, 2009; Campbell,

Actually I would be looking for data from 2019 rather than 2009 but we do get some sort of idea.

Businesses and Savers in Germany are being affected

We have got another signal of the spread of the impact of negative interest-rates .From the Irish Times.

The Bundesbank surveyed 220 lenders at the end of September – two weeks after the ECB’s cut its deposit rate from minus 0.4 to a record low of minus 0.5 per cent. In response 58 per cent of the banks said they were levying negative rates on some corporate deposits, and 23 per cent said they were doing the same for retail depositors.

There was also a strong hint that legality is an issue in this area.

“This is more difficult in the private bank business than in corporate or institutional deposits, and we don’t see an ability to adjust legal terms and conditions of our accounts on a broad-based basis,” said Mr von Moltke, adding that Deutsche was instead approaching retail clients with large deposits on an individual basis.

So perhaps more than a few accounts have legal barriers to the imposition of negative interest-rates. That idea gets some more support here.

Stephan Engels, Commerzbank’s chief financial officer, said this month that Germany’s second largest listed lender had started to approach wealthy retail customers holding deposits of more than €1 million.


The Bank of Japan has dipped its toe in the water but has always seemed nervous about doing anymore. This has been illustrated overnight.

“There is plenty of scope to deepen negative rates from the current -0.1%,” Kuroda told a semi-annual parliament testimony on monetary policy. “But I’ve never said there are no limits to how much we can deepen negative rates, or that we have unlimited means to ease policy,” he said. ( Reuters )

This is really odd because Japan took its time imposing negative interest-rates as we had seen 2 lost decades by January 2016 but it has then remained at -0.1% or the minimum amount. Mind you there is much that is crazy about Bank of Japan policy as this next bit highlights.

Kuroda also said there was still enough Japanese government bonds (JGB) left in the market for the BOJ to buy, playing down concerns its huge purchases have drained market liquidity.

After years of heavy purchases to flood markets with cash, the BOJ now owns nearly half of the JGB market.

In some ways that fact that a monetary policy activist like Governor Kuroda has not cut below -0.1% is the most revealing thing of all about negative interest-rates.


The Swiss found themselves players in this game when the Swiss Franc soared and they tried to control it. Now they find themselves with a central bank that combines the role of being a hedge fund due to its large overseas equity investments and has a negative interest-rate of -0.75%.

Nearly five years after the fateful day when the SNB stopped capping the Swiss Franc we get ever more deja vu from its assessments.

The situation on the foreign exchange market is still fragile, and the Swiss franc has appreciated in trade-weighted terms. It remains highly valued.


I have consistently argued that the situation regarding negative interest-rates has two factors. The first is how deep they go? The second is how long they last? I have pointed out that the latter seems to be getting ever longer and may be heading along the lines of “Too Infinity! And Beyond!”. It seems that the Swiss National Bank now agrees with me. The emphasis is mine.

This adjustment to the calculation basis takes account of the fact that the low interest rate environment around the world has recently become more entrenched and could persist for some time yet.

We have seen another signal of that recently because the main priority of the central banks is of course the precious and we see move after move to exempt the banks as far as possible from negative interest-rates. The ECB for example has introduced tiering to bring it into line with the Swiss and the Japanese although the Swiss moved again in September.

The SNB is adjusting the basis for calculating negative interest as follows. Negative interest will continue to be charged on the portion of banks’ sight deposits which exceeds a certain exemption threshold. However, this exemption threshold will now be updated monthly and
thereby reflect developments in banks’ balance sheets over time.

If only the real economy got the same consideration and courtesy. That is the crux of the matter here because so far no-one has actually exited the black hole which is negative interest-rates. The Riksbank of Sweden says that it will next month but this would be a really odd time to raise interest-rates. Also I note that the Danish central bank has its worries about pension funds if interest-rates rise.

A scenario in which interest rates go up
by 1 percentage point over a couple of days is not
implausible. Therefore, pension companies should
be prepared to manage margin requirements at
all times. If the sector is unable to obtain adequate
access to liquidity, it may be necessary to reduce the
use of derivatives.

Personally I am more bothered about the pension funds which have invested in bonds with negative yields.After all, what could go wrong?



21 thoughts on “The mad world of negative interest-rates is on the march

    • Hi Chris

      I have been trying to figure out their schemes work as they seem to have elements of both defined benefit and defined contribution. But there was some news later in the day.From Reuters.

      “Millions of Dutch pensioners were spared cuts to their retirement income in 2020 after the government granted pension funds a year’s grace period to restore sagging coverage ratios, although it said future cuts and higher premiums are likely.

      The retreat by Mark Rutte’s centrist government had been widely expected, given anger among pensioners and national elections due in 2021. But the decision could hurt the reputation of the Netherlands’ pension system, often rated ‘best in the world’ and framed as an example for other countries.£

      “best in the world” is quite a hostage to fortune isn’t it?

  1. Hi Shaun
    We are clearly heading toward a different form of
    totalitarianism if this madness prevails.
    Theoretically, if all the “Whales” soaked up each
    others assets, what would happen next?
    The only certainties are that our leaders will still
    preach democracy and the precious will remain
    err precious!


    • Hi JRH

      This has gone in many unexpected directions. For example the Swiss have made quite an effort to try and weaken the Swissy with the interventions and then the -0.75% interest-rate and yet it is just below 1.10 versus the Euro. The 1.20 cap is only on the edge of my 5 year chart now. Yet as you say on the other side we have seen a new model for pumping up equity markets. With the US S&P abpve 3100 they have made a profit but of course you have to one day crystalise it.

      One version of the future is central banks chomping on equities like pac-men and then cheering the new highs for equity markets. But who would they sell too?

  2. So in essence its one last hurrah with NIRP and epic printy printy, then the system as it currently is implodes to be replace with ………. a gold backed currency?

  3. Shaun,

    “Personally I am more bothered about the pension funds which have invested in bonds with negative yields.After all, what could go wrong?”

    Well the whole financial system could collapse is the worst scenario!

    There is an interesting article here on if you were a lender and lets face it you buy bonds, gilts and you become a lender in one sort or another:

    There are of course numerous ways of looking at this:

    Its normally the large depositor in a bank who will be charged for lending their money the European banks said lately they wouldn’t be charging small depositors but that could change if negative rates are ramped up, and don’t forget Carney said the same thing.

    As I have said before you cannot just look at Japan as a model to predict how negative interest rates will affect an economy there are too many variables in each country which in turn will affect how a particular economy will perform.

    Neither does anyone know so far how low negative interest rates will go medium to long term.

    What history does tell us however is what comes up comes down at some stage and that means financial assets as well.

    What I mean by that is the financial system and assets do crash at some stage and that may well happen sooner than some think, the world debt is out of control and many assets in different forms will collapse in due course.

    • Hi Peter

      We return to the basic point that in a world of negative interest-rates and yields any structure of long-term savings such as pensions has a problem. I have replied already to Chris about the Dutch schemes but stresses will be seen in many others too. As you say equities will one day fall and then where does one go?The old alternative of bonds for yield has been spun upside-down.

  4. “He also rejected the idea that the Fed might one day consider negative interest rates like those in place across Europe.”
    I want everyone on here to remember that quote, because next year or shortly after, the Fed will be going negative and the media will hardly mention his previous promise if at all.

    Since negative rates are now deflationary and are being applied to raise inflation seems also to be being ignored by the mainstream media, as Shaun points out this is a black hole from which there is no exit other than a bursting of the bond and stock market bubbles and of course, everyone’s favourite bubble the housing market. But the more the central banks try and keep the plates spinning, the more they hurt their precious, quite a quandary, but salvation is at hand in the form of more free money “borrowed” or should I say created out of thin air and with absolutely no feasible way for it to ever be repaid, by your government. Yes “austerity” is over, now the coming deluge of money will hit the economy with an inflationary vengeance.

    The coming inflation would, in days gone by, have caused a massive correction in the bond market, and caused huge losses for pension funds which are stuffed with all these artificially priced bonds, and since they are struggling to get sufficient returns to pay current and future pensions, there is no way future pensions will be paid at their projected values if this continues – even if there isn’t a bond or stock market crash – and the Dutch story mentioned above by ChrisLongs just proves it -it’s happening NOW, future pensions are going to be cut massively and runaway inflation will do the rest.
    The issue of a shortage of bonds for central banks to buy will be easily cured by massive fiscal stimulus paid for by new bond issuances, this fiscal stimulus will be justified as “investment in public services and infrastructure”, another Keysnian shot of adrenaline for the flat-lining debt addled junkies, expect the new UK government to make Viv Nicholson look like Scrooge over the next few years………

    • Negative interest rates have the same effect as taxation, they destroy money. So in the new MMT world we increasingly inhabit, vast government expenditure on the back of 100 year paper supported by the CB is ‘controlled’ not by interest rate hikes but deepening negative rates. As everyone will be ‘at it’ , currency speculators will have no targets. And it will be simplified by the general use of emoney.

      • Never forget what happened in Cyprus, those with huge balances had their money stolen, but referred to at the time as a “bail in”, they may try that again, especially if the depositors have the temerity to ask for their money back, I’m sure they will come up with a catchy sound name or acronym for it.

        • Kevin,

          Yes and it happened in Iceland.

          The Icelanders also took a further hit in some retailers where they had piled their money as well, when the financial system went pear shaped many retailers went under as well.

          The house of cards has fallen numerous times, I don’t remember the Wall Street crash but I do remember various house price slumps in the UK and a number of recessions and of course the financial crash in 2008.

          The thing is we haven’t recovered at all the system has only been held up by QE and low interest rates and as that is failing its now negative intertest rates and in the UK’s case both the Conservative and labour are now on a borrowing promise to win votes.

          More cheese anyone?

          • … a law introduced after the illegal (beause the bail-in law didn’t exist at the time) robbery of the Cyprus accounts. But those robbed were all Russian oligarchs … so that’s alright then ….

  5. “So perhaps more than a few accounts have legal barriers to the imposition of negative interest-rates.”

    You don’t really believe a bank would let a little thing like terms and conditions stop it squeezing more money out of its customers?!

  6. Hello Shaun,

    if the other posters are right then the middle classes are doomed so is democracy

    it would be a form of highway robbery ….. “stand and deliver!”


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