One of the subjects which has most exercised my mind over the past eighteen months has been the possible and then increasingly the probable spread of negative interest-rates. This has several different facets but they all involve savers and investors facing the prospect of having to pay to put their savings into either an institution or a bond. Back on the 2nd of September 2011 I discussed this matter thus on my Notayesmanseconomics blog.
As policy makers in the UK and US talk of more easing their minds may begin to focus on negative interest rates. Will they try to enforce them?
Since then the likelihood has increased and they have seen the European Central Bank use its elbows to push past them in the queue. In its response to the euro area crisis it has lowered the interest-rate on its deposit facility to 0%.
Let us examine the situation
Surely you would get no investment or savings?
The evidence so far is that the most obvious response is in fact incorrect. For example as of the latest available data (2nd of December) there is still just over 227 billion euros on deposit at the ECB. So quite a few people think that there is more to deposits than receiving interest. In this case I think that security (from being with a central bank) is the strongest factor with the other possibility being hopes for a rally in the value of the euro against other currencies.
Actually the situation is deeper than that because when the deposit facility saw its interest rate drop to zero funds did leave it. However it went to the current account at the ECB which pays as you have probably guessed 0% too. So adding up the true total gives you 717 billion euros. Makes you think does it not? Would it all go if the deposit facility was moved down to -0.25%?
Government bonds have joined in too
Switzerland has quite a few of its bond yields below zero, as I type this all of them up to the four-year point are. This does not mean that you cannot make money as the prices could rise and make the yields even more negative. However if you buy one of these at issue you would be paying 101 for example when you will only get 100 back at maturity which is risky for obvious reasons. A similar situation has also occurred in Germany where some of her bond yields have gone negative.
Why are you pointing this out now?
We have seen some banks offer negative interest-rates on wholesale deposits but on Monday one of the major Swiss banks has done so too. From Credit Suisse.
"WE HAVE DECIDED TO START APPLYING NEGATIVE CREDIT RATES ON CASH CLEARING ACCOUNTS ABOVE A CERTAIN THRESHOLD, AS OF 10 DECEMBER 2012.
And this came with something that would be unthinkable for most banks (as a feature of the post credit crunch era is that banks in general are desperate for cash).
"WE INVITE OUR CUSTOMERS TO KEEP CASH BALANCES AS LOW AS POSSIBLE TO AVOID NEGATIVE CREDIT CHARGES."
There has been speculation that the negative credit rates will be as high as 1% per annum but that remains speculation for now.
Is there a race to the bottom?
Those familiar with my economic analysis will be aware that I have described Japan and Switzerland as the "currency twins" often in the past. They are not quite that right now as the Japanese Yen does not have a cap against the Euro like the Swiss Franc. But as I explain below they may yet be negative interest-rate twins.
Japan and her electionWhilst poll leads are always tenuous before an election so far the Liberal Democrat Party has been doing well ahead of the elections on December 16th. This matters because its leader Abe San has proposed this.
- A change to the Bank of Japan Act (presumably to make it more malleable to his wishes)
- An adoption of an inflation target of between 2 and 3%
If we look at the effort the Bank of Japan has expended in trying and failing to raise Japan's inflation rate to 1% we can see the scale of what Abe San is proposing. Official interest-rates are very close to zero and it has expanded its Quantitative Easing Programme twice since this summer! Accordingly if Abe San means what he says the Bank of Japan will be forced in my view to take the first step into negative official interest rates and if its moves so far are any guide it could easily be substantial.
Tags: EU , euro , Euros , financial crisis , interest rates , Japan , negative interest-rates , UK , US