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.

The economic problems created by negative interest-rates and yields

One of the features of modern life is the number of official bodies telling us that negative interest-rates are not on their way. For example Bank of England Governor Mark Carney told us this only last week.

 I’m not a fan of negative interest-rate. We’ve seen the consequences of them in other financial systems. We have other options to provide stimulus if more stimulus is needed so we don’t need to go to that resort.

Only yesterday The Australian pointed out the view from a land down under.

Reserve Bank governor Glenn Stevens has scoffed at the notion of negative interest rates as a sustainable policy tool, saying “God forbid” Australia ever reached that point.

Actually both gentlemen had of course just taken their respective countries closer to negative interest-rates as we are reminded one more time to note what they do and not what they say! Overnight they have been joined by the Reserve Bank of New Zealand cutting by 0.25% to 2%. If the world economy is doing so well why is everybody cutting interest-rates? After all even Brexit surely cannot be blamed for moves on the other side of the world.

As to those wondering why the Kiwis only cut by 0.25% that is easily explained. The All Blacks had only been defeated in a rugby sevens tournament and larger cuts are reserved for defeats in the 15 a side game.

Negative Gilt yields in the UK

Unfortunately for what remains of Governor Carney’s shredded credibility negative Gilt yields are on the scene now in the UK as described by the Financial Times.

British government bond yields traded in negative territory on Wednesday.

They did so because after the QE debacle on Tuesday investors and funds knew that Calamity Carney would be sending in his buyers to purchase at almost any price, hence the record high prices and record low yields seen. As they bought medium-dated Gilts they drove short-dated Gilts higher and yields around the 2018 to 20 zone went negative. If Governor Carney does not want to face this then may I suggest a tattoo for both eyes!

The M&G Bond Vigilantes put it thus.

For the first time in history, we are seeing negative yields in the UK gilt curve. Two 19s and a 20 now trading with a negative yield.

As these are very hard times to be a Bond Vigilante we can overlook the fact that Gilt yields had in fact briefly gone negative on the day after the Brexit referendum.

Things are likely to get much harder for Governor Carney on Monday as he will be sending in his buyers to buy those Gilts on Monday and this week they avoided that as I explained on Monday. Markets may be waiting for him this time around.

Yields elsewhere are going lower

The Bank of England is adding to a trend we are seeing elsewhere. In addition to new highs for bonds in Australia and New Zealand, Spain saw its ten-year yield drop below 1% for the first time earlier this week. Only the major Euro countries have 2 year bond yields quoted but those that are have one thing in common, negativity. My subject of yesterday France has a -0.44% yield for its 5 year.

This should lead to a surge in investment surely?

Economics 101 and a whole litany of text books tell us this. Accordingly a whole slew of Ivory Towers would come tumbling down if it were not true. Well when the US Federal Reserve published research on this in 2014 ( h/t @edwardnh ) it was not so sure.

Yet, a large body of empirical research offer mixed evidence, at best, for a substantial interest-rate effect on investment.

Further on it was providing evidence that will have all the Ivory Towers moved to Pisa.

Among the more than 500 responses to the special questions, we find that most firms claim to be quite insensitive to decreases in interest rates, and only mildly more responsive to interest rate increases.

The IMF weighs in

There was a time when support from the IMF meant something and indeed it does but the opposite of what it did in the past as we review its disastrous involvement in the economic depression inflicted on Greece. It is in such a light we should review this.

A negative policy rate makes sense……….What has been the track record of the ECB’s negative rate policy—also adopted by other central banks, notably in Japan and Switzerland—after two years? Our paper finds that, so far, it has been successful.

However if you read the detail it has words like “should” and “intended”  and it has “contributed to a modest credit expansion” .Nowhere does it outright say it has boosted the real economy. Indeed as we move on from the initial hype I notice this.

However, there are unique challenges to negative rates in the euro area.

in essence the analysis is mostly about the banks ( The Precious) and after telling us why they should be lending more it gives reasons why they might not!

Banks in these countries face reduced margins not just on new lending, but also on existing loans,

Surely if some is good then more is better?

Overall, the ECB has limited room for further substantial rate cuts without hurting the profitability of banks.

Apparently not.

suggesting that the benefits from a negative interest rate policy might diminish over time

So we find out quite a lot about the banks and very little at all about the real underlying economy. Perhaps IMF researchers should get out more!

Pension Funds

This has been a theme on here for several years now because longer-term business models work increasingly poorly as interest-rates fall before not working at all in a world of negative interest-rates and yields. The Financial Times has now caught up.

The accelerating collapse of yields has widened already substantial gaps in many large pension funds, which use the rates to estimate how much additional funding they will need to meet benefit payments.

This is in one way a particular UK issue but illustrates also a much wider trend. We are back to when Andy Z posted the pensions illustration with one of the rates of return being -3%! What will we do when all of the rates of return have a minus sign? You have £100 now and by investing it for 20 years you can make it £50…..


The Ivory Tower theory is that lower interest-rates discourage saving. This may be true for some but certainly not everyone as the Wall Street Journal highlighted earlier this week.

Lasse Bohman, a 63-year old newsstand worker from Stockholm, said the concept of negative interest rates is “weird” and makes him want to save more for retirement rather than spend. “I am just going to keep on putting money in the bank,” he says, or “put it under the mattress at home.”

In general terms the problem is summed up here.

Some economists now believe negative rates can have an unintended psychological effect by communicating fear over the growth outlook and the central bank’s ability to manage it.

Yes I do. Especially if this story develops.

Word of the day. ‘STRAFZINS’! First German bank to charge negative interest rate to private clients ( h/t @jsblokland )


As the credit crunch has unfolded so many have told us that lower interest-rates will fix the problem. Yet each promise has turned to dust otherwise we would not be where we are and I would like to illustrate this with a tweet I sent out earlier.

If the world economy is doing as well as we are told why is everybody cutting interest-rates?!

Now we have an environment which increasingly includes negative interest-rates. Is there any cure in medicine which requires apparently endless ever higher doses or does that not look more like an addiction cycle? Frankly it looks like what was once described as pushing on a string.

Meanwhile Governor Carney may well be on his way to pushing the UK deeper into this so far bottomless pit. We are regularly seeing members of the Bank of England in the media using Open Mouth Operations to talk down the value of the UK Pound which will put upwards pressure on inflation. Thus with yields now so low the UK will be heading towards the most negative real yields of the major economies all from a man who claims “I’m not a fan of negative interest-rates.”

His Blockbuster looks like this.

Does anyone know the way, did we hear someone say
(We just haven’t got a clue what to do)
Does anyone know the way, there’s got to be a way

Me on Tip TV Finance



Get ready for negative interest-rates in the UK

There is a saying that a week is a long time in politics well it appears that this is also true in monetary policy especially for Martin Weale of the Bank of England. We do not need the TARDIS of Dr.Who to skip back to the 18th of July when he told us this.

This uncertainty points to the argument that we should wait for firmer evidence before making any policy change at least in the absence of any strong arguments for an immediate change.

And indeed this.

For there to be a case for easing policy I will need to expect weakness in output to be large enough to compensate for any overshoot in inflation on the assumption that policy is unchanged in the near term

This led to the view he would not be voting for any Bank Rate cuts a view which was reinforced by those who were reviewing events on the day.

MartinWeale‘s doubts over need for interest rate cut boost markets (Guardian)

Hold fire on interest rates says MPC member MartinWeale ( Daily Telegraph)

MartinWeale on the Bank of England’s policy response to Brexit. Steady as she goes… ( Frances Coppola ).

Such a view would be consistent with the fact that he has twice undertaken a series of votes for a Bank Rate rise ( 12 votes in total I believe) and even briefly rejected the mantra of Forward Guidance of “lower interest-rates for longer”. However of course there is something to be learned about the fact that on each of those three occasions he was found later to be retreating with his tail between his legs.


Here is the conclusion of the article on the interview he has given to Chris Giles of the Financial Times.

One of the UK’s top monetary policymakers has indicated he has changed his mind after a series of negative business surveys and now favours an immediate stimulus for the UK economy……..The new stance of Martin Weale, an independent member of the Bank of England’s Monetary Policy Committee.

Well not that independent currently! Top? Only as in spinning like one.But what is the firmer evidence for his change of mind? The emphasis on what is an extraordinary second sentence is mine.

What I said last week is that I would like more information as well as more reflection and I have had more information. Although you can’t say there’s a clear signal, if you spend all the time waiting for a clear signal, it never comes.

Whether the latter applies in his mind to the way he called for interest-rate rises then reversed such calls I do not know but what changed his mind?

They (Markit Purchasing Managers Indices) are the best short-term indicator we have at the moment. I certainly feel they are very material for the decision we’ll be taking next week,” he told the FT, adding that they were “a lot worse than I had thought” and showed “expectations have worsened sharply”

Okay so a reading of 47.7 ( on a scale which for Greece has gone into the low 30s) is much “worse than I had thought”. Odd when you consider that in some respects it is better than what the Bank of England was saying beforehand. Actually it indicates a possible mild recession if this next bit is true.

much of course depends on whether we see a further deterioration in August or if July represents a shock-induced nadir

The answer to which is unknown right now but you see as he panics there is a problem. He doesn’t think it will make much difference anyway!

One of the MPC’s problems is that monetary policy works with a delay, so action in August is unlikely to give the economy a quick boost. “If we’re talking about having an effect by the end of the year, there is very little that the bank can do,” Mr Weale said

Actually if you take the traditional view then a Bank Rate cut takes around 18 months to take effect so it will be in full force around New Year 2017/18 about which the PMI survey told us virtually nothing! Indeed he has to face the reality that the Open Mouth Operations of Bank of England policymakers like him have in fact made things worse.

Mr Weale rejected criticisms that the BoE’s warnings about the EU referendum outcome had created a self-fulfilling prophesy of doom.

Even the Financial Times with its long record of toadying to policymakers must have raised that issue which is revealing in itself.

What about QE?

Martin Weale seems rather keen on it.

Asset purchases are still likely to be effective,

Let us take a look at the ten-year Gilt yield which is 0.79%. So any gain from lower bond yields is pretty much used up. Has nobody told Martin? He does say in the interview that he is not keen on “discussing moves in financial markets.” Even if we go to the thirty-year yield it is only 1.67% which is extraordinarily low for the UK. For newer readers I recall days when the long-term Gilt yield was 15%. So any addition would be like tipping a thimble into the river Thames.

A theme song for Martin Weale

I have been receiving suggestions online but let me open with Kylie.

I’m spinning around
Move out of my way…….

Mistakes that I made givin’ me the strength
To really believe

And as suggested here are Dead or Alive

You spin me right round, baby
Right round like a record, baby
Right round round round

August will be Martin’s last vote at the Bank of England and it seems sadly thematic that after a year of votes for higher interest-rates he will panic and vote for a cut. Students at Kings College London may reasonably wonder what the value of his teachings will be?

Negative interest-rates are just around the corner

You might reasonably think that it is always RBS ( Royal Bank of Scotland) and you would be right! From the BBC today.

Natwest and Royal Bank of Scotland (RBS) have warned businesses they may have to charge them to accept deposits due to low interest rates……The move, if enacted, would make them the first UK banks to introduce negative interest rates, in effect, charging to deposit money.

I have to confess that the next bit made me wonder how many of the businesses concerned were still paying high interest-rates on the products that RBS miss-sold to them?

A spokesperson for Royal Bank of Scotland, which owns Natwest, told the BBC the letter was sent to just under 1.3 million of the combined business and commercial customers of the two banks.


There is much to consider here and let me open with an irony. There were, in my opinion enough votes for a Bank Rate cut next week anyway (6-3 I had it). So Dr.Weale has panicked and perhaps made things even more uncertain unnecessarily. He has also sent the UK Pound £ lower which is not what is required right now. He would have done much better to consider if after all the easing that has happened we need ever more that perhaps that is not the answer?! Also we get the second quarter UK GDP numbers tomorrow so if he had waited he would have seen more of the evidence he claims to want as in knowing where we were before the EU Referendum.

Meanwhile the UK looks set to move even closer to and possibly into the world of negative interest-rates. I fear that rather than making things better they will make them worse as so far no-one has negotiated their way out of them. Also there is any irony in a way in it being driven by a vote on the European Union as it is one of its products the Euro which has turned out to be like a supermassive black hole for negative interest-rates.

Mind you Dr.Weale has kindly provided a critique of his and the Bank of England’s independence

I have had no sense of the MPC and the Treasury trying to drag the economy in different directions


The world of negative interest-rates and yields continues to expand

Friday afternoon saw another nexus point in the development of negative interest-rates and yields. The US Employment Report saw not a few apparent contradictions but as a headline the non farm payrolls or NFP number was net negative. What I mean by that was downward revisions to past months at 59,000 were higher than 38,000 jobs created in May. This was awkward to say the least for all the US Federal Reserve members who has been jawboning via Open Mouth Operations about an interest-rate rise this month. A case of foot in mouth for a few! This brings us to a theme of this blog which is that promised interest-rate rises are either non-existent as in the Forward Guidance of the UK’s Mark Carney or are way underpowered like in the US. What I mean by the latter is that we started 2016 with promises of 3-5 interest-rate rises this year but as of today have seen none at all.

Interestingly such news does not seem to have reached the UK Prime Minister.

David Cameron has warned that mortgages could rise for millions of homeowners if Britain votes to leave the EU.

The Prime Minister has said average repayments could rise by nearly £1,000 a year because leaving Europe could lead to tighter credit controls as well as pushing up interest rates.

That was a bit awkward for Bank of England Governor Mark Carney as isn’t that what he has promised via his Forward Guidance? But if we look at financial markets we see that such rhetoric is in fact from a universe far,far away. Of course things may be different on June 24th whatever the result of the UK Referendum but these days interest-rates do not seem to rise even when it is supposed to be policy for them to do so.

Negative Yields

Fitch Ratings have upped the ante of the size of this problem.

The global supply of long- and short-term sovereign securities yielding less than zero now nears $10 trillion, constraining the ability of banks, insurers and other sovereign investors to generate fixed-income returns.

They had in fact provided a critique to the words of David Cameron if you substitute UK Gilts for US Treasuries in the sentence below.

One possible implication of a growing stock of negative yielding debt is increased demand for higher-yielding government securities like U.S. Treasuries, which could keep long-term yields low,

They also point out why this is a problem.

The total amount of negative yielding government debt stood at $9.9 trillion ($6.8 long-term and $3.1 short-term) globally as of April 25, 2016. This debt currently yields negative 24 basis points (negative $24 billion) annually. If historical rates were available today, the same securities would have yielded 1.23% ($122 billion) using 2011 yields, and 1.83% ($180 billion) using 2006 yields.

That is quite a lot of money taken out of the system as we see yet another side effect of QE (Quantitative Easing) style policies. These side-effects continue to build up but advocates invariably just mimic Agent Smith from The Matrix series of films and cry “More! More!” You see the problem would be solved in the economic models at the rarified heights of their Ivory Towers meanwhile below the clouds reality for plebs like us is rather different. So far 2016 has seen an extra US $4 trillion or so of negative-yielding government debt and lest we forget the advent of negative yielding corporate debt as well.

Meanwhile even the Japanese seem to be turning ever more Japanese.

Japan accounts for 66% ($6.5 trillion) of the total outstanding negative yielding debt, bolstered by the BOJ’s negative rate policy and increased purchases of Japanese government bonds.

Also more Italian government bonds are at a negative yield now.

More Negativity

The response to Friday’s US Employment Report was for world bond prices to rise overall and therefore for yields to fall further. The obvious link was to the US Treasury Bond market where the 2 year yield has become something of a proxy for interest-rate expectations and is now 0.79%. Now you can say that the official US interest-rate is 0.38% ( Fed Funds) or 0.5% (the target) but whichever you choose there is scope for a rise of 0.25% but not much more over the next 2 years. At the opening of 2016 as the Federal Reserve made its interest-rate promises it rose to 1.1%.

Bond markets like to flock together so you will not be surprised to read that this had implications elsewhere. From Nordea Markets and the emphasis is theirs.

the dismal employment number resulted in a sharp drop in the 10Y Bund to end the day at 6.7bp.

There are arguments as to whether this is a closing low for yields and high for prices but you get the idea if you think of 0.067%  a year for ten years. A grim outlook if you are willing to accept that. But this has other consequences if we look elsewhere in Germany’s bond market. It has a negative yield out to 9 years or over 70% of the market and the yield on the 5 year Bobl is so low that even the ECB will no longer buy it although of course it remains a back stop at -0.4%. I note ( h/t @YanniKouts) that we are seeing another side effect or unintended consequence of QE.

Spanish and Italian banks refrain from providing loans to the economy and increase purchases of German Bunds ~

Just for clarity that is exactly the reverse of the message from the Ivory Towers as we note yet again that central banking policy always helps the banks. Let’s face it the Italian banks do need a lot of help or as it is officially put they are “resilient”.

If we move to the UK then the 10 year Gilt yield closed the week at 1.28% which is very close to a record low for it. Nobody apparently told Prime Minister David Cameron as of course if it stays there we can expect even more record lows for mortgage rates. The 5 year Gilt yields 0.74% as opposed to the 2.1% when Bank of England Governor Mark Carney promised higher not lower Bank and hence mortgage rates with his Forward Guidance. Up is indeed the new down for him.

Is financial advice from Bank of England Governor’s and indeed Prime Ministers subject to miss-selling rules?


The advent of negative interest-rates was something which was supposed to be temporary just like zero interest-rates or ZIRP. Whereas in reality just like the 0.5% emergency Bank Rate in the UK which has lasted over 7 years they look ever more permanent. For example we were told that Denmark would be moving away from them as 2015 moved to 2016 whereas I note this today from Bloomberg.

Most private-sector forecasters don’t expect Denmark’s central bank to go positive again until 2018 at the earliest

Also we have an official denial of problems from the Governor of the Nationalbanken.

There’s no sharp, disruptive movement when you pass below zero.

Regular readers will be aware that official denials invariable spell in Taylor Swift speak “trouble,trouble,trouble” and once we are past the official denials we see my themes appear.

Conversations in Copenhagen these days turn quickly to real estate.

Really? Why?

There’s no question negative rates have driven up the price of owning a piece of this urban vitality. Apartment prices per square meter soared 43 percent between the start of 2010 and the end of 2015, according to real estate broker Home; in early May the International Monetary Fund urged the government to rein in Danish house prices.

We see sign of estate agents having been busy with “urban vitality” a bit like calling some of Battersea, South Chelsea or how Stockwell is in urban myth St. Ockwell. So first-time buyers of property in Denmark will have seen “disruptive movement”. Oh and this made me smile.

Real estate players also argue that Danes, temperamentally, are a risk-averse bunch—especially with memories of a 2008 property crash still fresh

Please run me by how they had a crash then?

There is more.

DSV…found itself in a tricky situation in November, when it sold 5 billion kroner ($750 million) of shares to fund a takeover of rival UTi Worldwide. Short of renting a huge vault, that meant sitting on most of the proceeds at negative rates until the deal was finalized in January, at a cost of about 4 million kroner.

The Wall Street Journal notes that in fact low interest-rates may have caused problems perhaps they might send a copy to the Governor of the Nationalbanken.

Why Aren’t Low Rates Working? Blame Dividends
Since the Federal Reserve took rates to near zero, companies have boosted buybacks 194%.

Lest we forget

On this day in 1944 my grandfather amongst others was on a trip to Germany via France.

Will the spread of negative interest-rates lead to a ban on cash?

Last Friday saw a new front opened in the world of negative interest-rates as the Bank of Japan joined the club by declaring an official interest-rate of -0.1%. At the time we discussed the possible rationales for this leading to two intertwined themes. The first involves an outbreak of currency war in the Far East between Japan and China and South Korea. The second involves the Bank of Japan preempting a further move lower from the European Central Bank. Let’s face it the ECB has been heavily hinting that it will plunge even further into the icy cold world of negative interest-rates in March. Thus -0.3% seems set to become -0.4% or -0.5%. Today I intend to look at some consequences of all of this.

Bond yields

This has been the most obvious move and this morning has seen an intriguing development. From liuk on Twitter.

MNI: SAYS NEW 5-YR BOBL DUE FEB 3 TO HAVE 0% COUPON || … and price ABOVE 100… the beauty of  (Negative Interest-Rates)

We should not forget how significant a development this is. After all the point of bonds was supposed to be that they pay interest and thereby acquire a value! This has no coupon or interest and even worse is priced above 100 so holders to maturity will be guaranteed a loss. On this road the business model insurance and pension companies faces an IED. Thus investment depends on a combination of the safe haven status of Germany and for foreign investors the strength of the Euro which of course is the same Euro the ECB is trying to push lower.As we stand the five-year yield in Germany is -0.3% and the two-year is -0.47%.

Japan has seen its bond yields plunge since its own announcement and there has been a similar picture where yields up to the five-year maturity dip to -0.1% as markets test the limits of what the Bank of Japan will buy at. The ten-year JGB yields a mere 0.05%. In fact if we raise our sights we note this new world as summarised by the Financial Times.

The BOJ’s action, which sets the stage for further central bank stimulus later this year, spurred investors to buy government bonds and pushed the universe of outstanding negative yielding bonds in Japan and Europe to a new peak of $5.5tn.

Personally I find the fact that Italian two-year debt has a negative yield ( it keeps dipping in and out of it) the most extraordinary. But those who used to use bond markets for yield now have a problem. You don’t get much in the UK ( ten-year 1.62%) or US ( ten-year 1.93% either. I guess everyone has piled in.

Who’s next?

If we use one of Pete Townsend’s album titles we find ourselves wondering who might be next. I have long argued that the Bank of England would be on the case should there be any dip in the UK economy which was reinforced by the words of Andy Haldane last September.

It involves finding a technological means either of levying a negative interest rate on currency……….here could be a need to loosen rather than tighten the monetary reins as a next step

Gertjan Vlieghe has headed in that direction too so there are two probable votes on a dip.

The United States would seem most set against it but even there this year we have had the words of Stanley Fischer.

Another possible step would be to reduce short-term interest rates below zero if needed to provide additional accommodation.

An odd point to make when you have just raised interest-rates and then promised another four increase in 2016! The theme here is that even in the US thoughts are congregating in this area and on this subject.


An attraction of gold in the current world is that negative interest-rates do not apply to it. Markets seem to be shifting back in its direction as the dip to US $1050 in December is replaced with US $1126 now. Not a surge but perhaps a shift after four years of declines.

Actually holding gold does have costs such as insurance and storage which is one of the reasons why I think that the state of play with negative interest-rates changes fundamentally at around -2%.

Banning cash money

This concept was raised by Andy Haldane of the Bank of England last September.

A more radical proposal still would be to remove the ZLB constraint entirely by abolishing paper currency.

He was followed by Stanley Fischer this January.

That observation has led some to ask whether it would it be possible for the financial system to operate effectively without physical currency provided by the central bank.

Then there was this from Andy Haldane

it has the added advantage of taxing illicit activities undertaken using paper currency, such as drug-dealing, at source.

Please keep that in mind as you read the next bit.

The 500 Euro note

It was only on Friday that I pointed out that according to Gabriel Sterne that via the 500 Euro note then you could hold the equivalent of one billion US Dollars in the smallest possible space. In case you are wondering it is 3 metres cubed as opposed to 12 in US Dollars, 16 in Japanese Yen and a bloated 21 in UK Pounds.

The use of high-denomination notes, in particular the €500 note, is a problem reported by law enforcement authorities,” according to a draft of the plans seen by the Financial Times. “These notes are in high demand among criminal elements . . . due to their high value and low volume.”

Well maybe not only criminals as this next bit from the Financial Times shows.

The €500 note, beloved by gangsters and Greek savers, is now being investigated for ties to terrorism.

Ah yes the Greeks trying to flee possible haircuts on their savings. Is that considered a criminal act these days? One for my financial lexicon for these times I think. Actually to do anything about this the European Commission needs to persuade the ECB which controls the supply of notes and coins. So what does ECB President Mario Draghi think?

“We want to make changes,” he said, adding that “we are determined not to make seigniorage a comfort for criminals.”

Again we wonder if a Orwellian style definition of criminals such as those trying to avoid ECB monetary policy is at play here.

Some of this is the law of unintended consequences as back in the day I thought that the Euro 500 note was introduced to help demand for the Euro. It always was the highest denomination note around amongst the major central banks and this  lead to demand  for it, some of it genuine but some of it was always going to be from criminal activities. These “criminal activities” were effectively encouraged but now 16 years later Europe has suddenly spotted it? The best reply is from Ajm to the Financial Times article.

If you see a €500 note in your wallet acting suspiciously, do not attempt to move it, but report it immediately to the authorities …

Pension Funds and insurance companies

Much of the business of these organisations relies on their being a positive rate of interest or at least return. Who would invest/save for the long-term when you are offered a loss? The World Bank tries to skirt the issue but cannot avoid it.

through funding problems for some non-bank financial
institutions, and through excessive risk-taking by
investors seeking a higher rate of return.

This bit is clearer though.

As discount rates of zero or less have no economic meaning, a prolonged period of negative interest rates would create large ambiguities for the valuation of assets and liabilities.

What could go wrong? Well this.

Under negative interest rates, some non-bank financial institutions—especially pension and life insurance companies—may struggle to meet their long-term liabilities, such as pensions or life insurance policies, offered at fixed nominal rates


I wanted to cover today the development of negative interest-rates so far and the risks going forwards. The intellectual debate and yes you could call the use of intellectual in this context an oxymoron is clustering around the issue and as even the supporters are considering what’s next after it? You can see that there is little confidence in it working. That is hardly a surprise as to be a supporter you have to argue that interest-rate cuts of the order of 5% have not worked. That is an odd line if you think that 0.1% of negativity will to say the least.

So they are on the march both in size and geographically and on that road there is a point where those with savings will be singing along with the Rolling Stones.

The floods is threat’ning
My very life today
Gimme, gimme shelter
Or I’m gonna fade away




What is the impact of negative interest-rates?

If I look back I note that the prospect of negative interest-rates has been a theme of this blog since 2010. Back then I was in a minority considering the issue but now of course we have a reality which cannot be ignored which is centered on the Euro area with the European Central Bank (ECB) having a deposit rate of -0.3%. This applies as of yesterday to some 775 billion Euro’s in the deposit and current accounts of the ECB. Such a reality has had quit an impact on the countries surrounding the Euro are as we see that Sweden has an official interest-rate of -0.35% and Switzerland of -0.75%. There is also Denmark which has a central bank which is so nervous of what might happen that it raised interest-rates by a mere 0.1% last week.

The monetary policy rate spread to the euro area is thereby narrowed from -0.45 to -0.35 percentage point.

You may note that the new interest-rate of -0.65% was defined with reference to the Euro as we wonder if anyone particularly took much notice outside the boardroom of the Nationalbanken. Not perhaps the Swedish Riksbank as I note speculation today that it will cut again to 0.5%. So what have we learnt and what are the consequences?

A dash to cash?

There were theories before negative interest-rates became a reality that there would be cash hording because currency has a 0% interest-rate. However we can now say that there have been few i any signs of this so far. The one dash for cash in 2015 was seen in the Euro area but it was driven by fears of possible haircuts at Greek banks rather than negative interest-rates.

So we see that at interest-rates down to 0.75% there seems to be little or no effect. Whether the fact that the Scandinavian countries are in the van of using less cash and more electronic forms of payment is an influence is hard to say. But we can be sure that central bankers around the world will have watched this development. Stanley Fischer of the US Federal Reserve certainly has been.

Cash holdings have not risen significantly in these countries, in part because of nonnegligible costs of insuring, storing, and transporting physical cash…. It is unclear how low policy rates can go before cash holdings rise or other problems intensify.

As to the begged question I would say between -1% and -2% I would expect more of an effect.

Bond Yields

This is something that was not thought through at all well before the credit crunch hit. But many bonds in the European scene have seen negative yields with estimates hitting the 3 trillion Euro mark. As I type this even Italy is on the threshold (0.01%) at the 2 year maturity and Germany is at -0.14% even at the five-year maturity. In Switzerland even the 10 year yield is negative (-0.13%) as we see that in essence its bond market has seen not far off a replacement of positive yields by negative ones.

This development has heavily influenced the financial landscape in Europe and indeed the rest of the world. This is because those looking for positive yield have found themselves looking at UK Gilts and US Treasuries. In my opinion this is one of the reasons why yields in those two countries have not risen and in some cases fallen giving them rather extraordinary yield patterns if you compare them to economic developments. Another credit crunch first.

However things just like in the cash or currency world have not developed as one might have expected. In fact bond markets with negative yields have seen more and not less demand at times in a type of perverse or inverse demand curve. Why? I think that this has been driven by overseas investors where 2 other factors have swamped the prospect of a yield loss. The first is currency expectations and the second is fears of haircuts in other banking sectors. After all if you were Russian, Ukrainian or more surprisingly perhaps Australian or Canadian then currency movements in 2015 were a much bigger influence than any negative yield.

We also have the issue of QE which has been used to drive bond yields lower at the same time. This makes me wonder if we will ever have negative interest-rates in a non-QE world as well as with the reluctance of countries to reverse QE whether it will be permanent or at least permanent in most of our lifetimes.

Links to the real economy

Here we have had some connections but in a rather familiar theme some disconnections.

Asset Prices

Well the clearest case here of what might be a typical Eurovision entry of “bang boom boom” has been demonstrated by house prices in Sweden. From Sweden Statistics this morning.

Real estate prices for one- or two-dwelling buildings increased by more than 2 percent during the fourth quarter 2015, compared to the third quarter. Prices increased by more than 11 percent on an annual basis during the last quarter, compared to the same period last year.

As ever in such a situation the heat is on in the cities and three municipalities are reporting annual increases of over 20%.

The situation with equity prices is more complex with a myriad of issues not least the falls in 2016 so far. But as I type this the Eurofirst 300 equit index is at 1317 or around 70 points lower than when the ECB make the fateful decision to go negative with its deposit rate.

What about interest-rates for the common (wo)man?

This has been intriguing and is one of the reasons why there has not been a major dash for cash. The impact of negative interest-rates on deposits has mostly only affected institutional depositors as well as those individual’s with very large deposits. One small Swiss bank has dipped its toe into spreading this to more ordinary depositors in 2016 so we wait to see if more join. But so far negative interest-rate have not replaced near zero ones. Ironically 2016 has seen quite a few deposit and savings rates reductions in the UK where we were supposed according to Bank of England Governor Mark Carney to be getting higher interest-rates!

Mortgage rates

These initially generated some headlines as some headed towards zero and flirted with below it. However I will let Andréa M. Maechler of the Swiss National Bank take up the story.

While the introduction of the negative interest rate caused interest rates on the money and capital markets to decline, mortgage rates did not decrease to the same extent. Indeed, for long-term mortgages, interest rates are slightly higher than they were at the beginning of the year.

Then we get an admission of something we can take credit for discussing on here.

As a result, banks’ interest margins have come under pressure.1 To partially offset this effect, banks have raised their mortgage interest rates

As yes monetary policy by the banks for the banks of the banks and so on….

Economic growth

This again is a cloudy picture. We have the good and also the bad shown below.

The strong economic development in Sweden continued during the third quarter when GDP rose by 0.8 percent, seasonally adjusted.

Denmark: Gross domestic product fell 0.4 percent sequentially, larger than a 0.1 percent fall estimated in November and reversing a 0.2 percent expansion seen in the second quarter. (h/t RTTnews )

As you can not much light is shed by that as even the Nordics are seeing very different results from similar medicine.


As you can see this is another clear fail for the text books of economics. Although we are not as irrational as some may claim as they try to cover their tracks. But we do need in my opinion to take the advice of “You’re the one that I want” from Grease even if we don’t want them.

You better shape up, you better understand

Because if 2016 continues on its current trajectory we may well be seeing more of them and if not well we return to the issue of what central banks do when the economic cycle turns to recession again? After all the mantra is very activist these days.





How do Negative Interest Rates affect economies and the ordinary person?

On Thursday we are expecting to see a further dip into the icy-cold world of negative interest-rates made by the European Central Bank. After all the hints and promises made by its President Mario Draghi its deposit rate is expected to fall from the current -0.2% to either -0.3% or -0.4%. Also the negativity if I may put it like that will be reinforced and backed up by an extension to the Asset Purchase Program or QE via an extension beyond next September and/or a faster rate of purchases. These expectations have seen an extension to the negative interest-rate environment already.

If we look at bond yields we see that the two-year yield in Germany has fallen to -0.42% predicting a cut to -0.4% if it is right. However more remarkable is the way that five-year yields in France are dipping in and out of negative territory and the same for the two-year yields of Spain and Italy. So we see a litany of markets where price discovery has been abandoned as a method of determining economic reality and instead they depend on the cheque book of the central bank.

On Thursday if Mario Draghi carries out his hints and promises we will see the ECB take the Euro area further into the world of negative interest-rates and I mean this in terms of amount and length of time. What impact will this have?

Is it necessary?

There is a real problem here as this morning we have seen data which suggests that the Euro area economy if not surging is doing okay. For example there was this from Germany.

In October 2015, roughly 43.4 million persons resident in Germany were in employment….. Thus employment surpassed the record high observed in September 2015 since German reunification.

Employment has been a leading indicator in the credit crunch era ( in the UK for example) but you could argue Germany is a special case. But there has also been this for the whole Euro area from the Markit PMI.

The eurozone manufacturing upturn gained further momentum during November, with rates of expansion in production and new orders the fastest for around one-and-a-half years. Growth was broad-based by country, with output and new business inflows improving in almost all of the nations covered (the exception being Greece).

As monetary policy is already very expansionary then the ECB seems set to make a policy error on Thursday. If recent speeches are any guide it will claim that the improvement is due to its policies (skipping over the oil price fall) and point us towards inflation being below target. It may even highlight the -0.4% CPI inflation reading in Italy.

Sweden is an example

If we look to see what negative interest-rates can do in an environment of falling oil and commodity prices let us look yesterday’s development in Sweden.

Sweden’s GDP increased 0.8 percent in the third quarter of 2015, seasonally adjusted and compared to the second quarter of 2015. GDP increased 3.9 percent, working-day adjusted and compared to the third quarter of 2014.

This would in the past have a central bank looking for the punchbowl so they could take it away but of course the Riksbank has its foot firmly on the accelerator as it indulges in pro rather than anti cyclical policy. If life was that easy then central bankers would be found permanently on the beach or ski slopes before we realised we could just open the taps permanently and fire them. The catch? Here is a clear example if we look at private-sector debt.

Most of the increase can be explained by housing loans, which increased by SEK 196 billion and amounted to 2 655 billion in total in October. Housing loans had an annual growth rate of 8.1 percent in October, which is an increase compared with September when the growth rate was 8.0 percent.

The consequence of this for house prices can be filed under this from the Black Eyed Peas.

Boom boom boom (Gotta get get) [x4]

Boom boom boom (now) [x2]
Boom boom boom [x2]

House prices in Sweden have risen by 2% in the quarter to October and by 10% on a year before with a few districts in Stockholm rising at over 20% annually. If we look back we see that house prices have reached “escape velocity” since the Riksbank started cutting interest-rates. The house price index of Sweden Statistics was 492 at the end of 2007 and was 668 at the end of the third quarter of 2015. What credit crunch house prices might say?!

Is that what the ECB is aiming for in the Euro area where debt both private and public sector is compared to assets (house prices) more favourably? My argument which I am sure that prospective house buyers in Sweden will agree with is that would be misrepresenting inflation and is we allow for that more accurately a lot of the recorded economic growth fades away.

How did a housing boom work out for Spain and Ireland in particular?

Interest-Rates for the ordinary person

These have not turned out to be as expected or hyped. Let me give you an example from  Statistics Sweden to illustrate this.

The average interest rate for housing loans for new agreements was 1.59 percent in October, which implies that it increased compared with September when the average interest rate was 1.58 percent.

Whilst there may be an occasional example of negative mortgage-rates, for example ones set in relation to official rates as happened in the UK, they are still a fair way away overall. So much lower but not negative is the message here.

In the world of savings and in particular bank deposits then negative interest-rates were assumed to be something that would be passed on very quickly. But in fact banks have generally avoided this. For example I have just been searching in Sweden and if the online tables are up to date you can get 0.3% for a year with Nordea Bank. Not much but also not negative.

However “the times they are a-changing”. Remember this that I pointed out on the 19th of October?

From the first of January, customers of the Alternative Bank Switzerland ABS will not only get no interest, they have to pay even itself 0.125 percent interest that they may give their money to the ABS.

A small Swiss bank is dipping its toe in the water of negative interest-rates for savers and depositors. Interestingly quite a few places have been reporting this as news in the last week or so which puts them more than a month behind us and in the category of slooooow news.

What we take forwards from this is that it takes at least a year for the impact of negative interest-rates in the wholesale and money markets to reach the ordinary person. That year is only seeing a dipping toe rather than a wide scale move. Maybe that will change should we see more countries dragged into the supermassive black hole that is negative interest rates but as we muse on the subject that is the evidence so far.


There are various lessons to be learned from the negative interest-rate experience so far so let me explain them. Firstly dips into the pool seem to create the demand for further reductions as we hear Agent Smith calling for “More! More!”. Secondly no-one has yet escaped from it and I am thinking of Sweden here as you might think that an annual growth rate of nearly 4% would provide such an opportunity. Thirdly the danger is of overheating private credit and loans leading to a house price boom. Fourthly there is the oddity of such a policy being pursued when the outlook for the countries concerned was already being boosted by lower oil and commodity prices. This makes us wonder if genuine economic improvement is what is being planned or not? So in summary we turn to Coldplay.

Oh, no, I see
A spider web, and it’s me in the middle,
So I twist and turn,
Here am I in my little bubble,

For the man and women in the street then negative savings and deposit rates have in general not occured and I think the banks are afraid of what would happen. However as time passes that will change and the negative interest-rate sage will take another dark turn.

Meanwhile there is another feature which is geographical and that is that the countries afflicted are in or near to the Euro area. Even the IMF seemed to abandon its “on track” methodology yesterday as in essence adding the Chinese Renminbi to its Special Drawing Rights saw quite a reduction for the weighting of the Euro.