“The stimulus the country urgently needs is not experimental and dangerous monetary policy.”
By Nick Corbishley, for WOLF STREET:
Andrew Bailey, the recently appointed governor of the Bank of England (BoE), is considering going where no other BoE governor has ever gone in the central bank’s 325-year history: into negative interest rate territory. On May 20, Bailey told British MPs that the BoE is refusing to rule out cutting the benchmark interest rate below zero in response to the virus crisis.
“We do not rule things out as a matter of principle. That would be a foolish thing to do,” Bailey told MPs. “But that doesn’t mean we rule things in either.”
That statement came just six days after Bailey had told FT readers that negative interest rates are “not something we are currently planning for or contemplating.” Since then, Bailey says he has “changed [his] position a bit.”
Bailey, who replaced Mark Carney as BoE governor just two months ago, is not the only senior BoE official who’s apparently warming to the idea of foisting negative interest rates on the British economy.
So, too, has the central bank’s chief economist Andrew Haldane, who last week said: “The economy is weaker than a year ago and we are now at the effective lower bound, so in that sense it’s something we’ll need to look at – are looking at – with somewhat greater immediacy. How could we not be?”
In the wake of the virus crisis, the Bank of England has already slashed interest rates by 0.65 basis points to 0.1%, its lowest level ever. It has also revved up its swap lines with the Federal Reserve and other central banks, offered billions of pounds of fresh liquidity support to banks, and expanded its QE program by £100 billion to £745 billion and extended what it buys to include corporate bonds.
On Wednesday, markets responded to Bailey’s ambiguous comments on negative rates by pushing the yields on gilts into negative territory for the first time ever. The UK Debt Management Office was able to sell £3.75 billion worth of three-year gilts at a yield of -0.003%, meaning that investors are now effectively paying to lend to the UK government, which is great news for the UK government as it massively increases its spending.
But not everybody’s happy about the BoE’s new openness to negative rates. While British bank executives have so far avoided a direct confrontation with Bailey, former UK pensions ministers, bank analysts and fund managers have warned that the move would be devastating for savers and could obliterate banks’ interest margins and profits. Here are six of the choicest quotes:
“Trying to fund pension liabilities with guarantees could become ruinous. Negative rates are an unwelcome distortion of capital markets. The policy is designed to boost growth, but its side effects could have damaging consequences that play out badly.” Ros Altmann, the former pensions minister (Telegraph).
“The stimulus the country urgently needs is not experimental and dangerous monetary policy, but rather an early end to lockdown before more businesses, jobs and lives are destroyed.” Investec analyst Ian Gordon (Telegraph).
“With interest rates already effectively at zero, we don’t think it’s the cost of capital that is restraining any liquidity, it’s really the availability of it and making sure that it’s getting to the parts of the economy that need it.” Goldman Sachs Asset Management analyst Andrew Wilson (Telegraph).
“If you were thinking it couldn’t get worse, negative interest rates would have a much longer lasting impact on UK banks’ profitability than current concerns on credit quality.” analysts Rohith Chandra Rajan and Alastair Ryan, Merrill Lynch International.
“The big banks will hate negative rates.” Paul Lynam, chief executive officer of Secure Trust Bank Plc.
“I can’t think of an economy where negative rates are a worse idea than the U.K. How on earth does it make sense to even consider adding negative rates to the mix? The economic benefits are dubious but the power of a cocktail of negative rates and massive QE to weaken the currency seems clear. Kit Juckes, strategist at Societe Generale (Pensions&Investments).
What was supposed to be a short-term emergency experiment has become standard policy at the Swiss National Bank, the European Central Bank, Denmark’s National Bank, Sweden’s Riksbank, and the Bank of Japan. But in December the Riksbank abandoned the experiment over concerns that negative interest rates were fueling rising asset inflation and rising debt.
Negative rates have also drawn criticism from the Federal Reserve. Fed Chair Jerome Powell said on May 13 that “the evidence on the beneficial effects of negative interest rates abroad was mixed,” and “that it was unclear” what effects negative rates have on banks’ willingness “to lend and on the spending plans of households and businesses.” They also damaged the profitability of banks and are “not something that we’re looking at,” he said.
Bundesbank president Jens Weidman also criticized negative interest rates, including in a speech to the European Banking Congress last November, citing two reasons: one they hurt the profitability of banks and could cause them to “cut back on lending”; and two, they stimulate the “search of yield” and cause investors “to take on undue risks that could sow the seeds of financial imbalances” and asset price inflation.
The Bank for International Settlements (BIS) also lashed out against them. “There is something vaguely troubling when the unthinkable becomes routine,” said the head of the BIS’s Monetary and Economic Department, Claudio Borio. Even the ECB, the Bank of Japan and the Swiss National Bank have conceded that negative rates weaken banks, but they still continue to use them. By Nick Corbishley, for WOLF STREET.
First the Global Financial Crisis, then the Euro Debt Crisis, now the Big One. Read… Third Mega-Crisis in 12 Years: Eurozone Economy Plunges at Fastest Rate on Record
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Meh, you could get angry,.
Very, very, angry.
Alternatively, you could just watch metals, sleepily, wake.
I’m not an expert. I’m not by any means. But, as still (just) an important alternative currency to the US dollar, how does this help?
I mean, really, answers on a postcard!
Credit card companies will pay you to buy things you don’t really need.
Amen to that Tim
A few years ago Andy Haldane, Chief Economist at the Bank of England, wrote a white paper on negative interest rates. This man is desperate for them but he also wanted to abolish physical currency. He knows people will take money out of the bank when negative rates are passed over to depositors. He also wrote that once physical currency has gone they could go deep into negative territory with interest rates, as deep as the like. These people make me very angry too.
Suite says negative rates are not ruled out.
Other suites say that is shocking.
That is shocking.
Could you explain?
What, can’t sleep?
Bank income will be impacted by negative rates. There’s also the implication that it will encourage (counterintuitively) deflation for a while, i.e if we start down that road, where will it end. (Deflation is bad for existing debt.)
Sitting back with popcorn, and having a good laugh as the Toronto Mayor is just about flipping out on the accumulated debt the city is experiencing and wanting the broke Province to pay for their spending and spending.
He says can’t have growth without spending.
No clue…on responsible spending.
Now threatening to add more layoffs…
Looking for government aid right now.
And what has the Major of Toronto been doing for the last 2 months?
Spending as usual!
The politicians tend to spend on the wrong stuff such as trips to China on the pretense of business, studies and more studies, non profit programs, drug sites for addicts, more studies and consultants.
Spin their wheels spending while getting nothing done.
Only the Federal government can magic money out of nothing, so the province isn’t going to be doing the bailing. Fortunately for the mayor, the Liberal minority really needs those 416 area code votes so it will all unfold as it usually does.
The lockdown’s doing wonders. We finally have birds chirpin’ and central banks NIRPin’. The Fed’s skirtin’ but they know it’s lurkin’. Orange man’s smirkin’ but banks be irkin’. The working class be workin’ but their savings accounts and pensions be hurtin’. And I need to go back to workin’….
Thank you for this, Deer. That’s a nice piece of work there. Very entertaining.
Very reminiscent of “The Rowing Song” from Willy Wonka, which also seems appropriate for the times…
“There’s no earthly way of knowing
Which direction we are going
There’s no knowing where we’re rowing
Or which way the river’s flowing
Is it raining, is it snowing
Is a hurricane a-blowing
Not a speck of light is showing
So the danger must be growing
Are the fires of Hell a-glowing
Is the grisly reaper mowing
Yes, the danger must be growing
For the rowers keep on rowing
And they’re certainly not showing
Any signs that they are slowing”
In a nutshell, Bob!
I can’t stand how all these big names are finally mentioning all the failings and dangers of QE as if it is a new thought and deserves some kind of discussion. We know its ridiculous and just creating imbalances and zombie corporations…same as we knew in 2008 that disaster was coming and they all pretended not to saying “no one could know this was coming”. Now that the mainstream is saying how stupid and dangerous it is finally can’t some “big shots” with a grain of decency come out and tell them to cut it out even though..yes, asset prices will fall because they were not supposed to be there in the first place.
That’s probably the most infuriating part when it comes to the discussions of this because they talk like asset prices deserve to be where they are based on fundamentals so don’t want them to fall … but that’s just it…we’ve tried all the ways to cheat and the only fix now is just ending the cheating and letting them fall to where they should be.
They new the words to the song but still played it all along.
It is really amazing to see all these central bankers have so many examples of negative rates NOT working and then going over the dam. The banks are the conduit to get money to the consumers and corporations. Negative rates will kill their NIM’s, so they will stop lending. Hopefully, the Fed sticks to their guns.
I think it is more about helping the government to borrow for nothing than any concern about the people or the economy!
Who would have thunk that the times of being bombed by the Luftwaffe were the good old days?
Think about that, having you cities bombed and being under imminent threat of invasion didn’t lead to the insane fiscal policies the UK has today.
“Bank of England (BoE), is considering going where no other BoE governor has ever gone in the central bank’s 325-year history: into negative interest rate territory.”
My mother hid from the Germans during the Blitz, with her cat, under a table – which we still have.
She says that she actually felt safer then.
And one could still buy flour when needed during WW2, almost impossible now in the UK.
The Age of Monty Python governance in Britain; and King Arthur died long, long ago……
Can’t buy flour? What a load of rubbish. Stop scaremongering.
Have you checked? It was hard to get flour in the U.S. for a bit. Yeast too. Now you can get both, but never King Arthur or Fleischmann’s, my brands. Where are those brands going now?
But, yes, big picture, the lack of flour is not a sign of a dangerous lack of food, as it would have been in the worst if WW II.
If I told you that rusks (yes, rusks) have been impossible to find here since February 24 would you believe me? Even now that stuff like chocolate is slowly returning on the shelves and apart from this area (obviously) Italy is out of it you cannot find rusks at any price.
Plenty of supply chains are broken, and likely to stay so for quite a bit as people (starting from me) just don’t trust politicians in the least anymore.
To stay on theme despite being a food-producing business the local mill announced they will take a decision whether to re-open or not on June 1. The owner is sure lockdowns will be re-imposed shortly so why bother?
Same thing about one of our historical tableware manufacturers: they “may” re-open in early June, but the owner wants to see what direction the wind blows before calling back his workers.
Right now the problem is not the virus anymore. Just use common sense and you will be fine. Right now the problem are the politicians. I can wear a facemask and gloves to defend myself from the virus but I am completely powerless against politicians. Somebody should invent a vaccine for that, I’d pay good money for it.
It’s called anarchism. Came out years ago like most of the meds for corona but probably won’t be widly adopted as there’s no profit in it.
Is our Bank of England still buying 435 Billion Pounds of US Treasury Bonds a year ?
“…still buying 435 Billion Pounds”
Well, there appears to be a little confusion here between “buying” and “holding.” In March, the BOE held (owned) $395 billion in US Treasuries. That’s all it had. They mature at the maturity date, and the BOE gets its money back when they mature, and so it buys new ones to replace the ones that matured. I do that in my account too.
Good management Wolf, as expected. Just curious, have you established any swap lines with SNB, BOJ, BOE and ECB yet? We all know you’re a bigger player than you let on.
Not yet, but the Fed is buying my WOLF STREET junk bonds ?
The irony of the world we live in is the following:
1. The shutdown at least has some scientific basis. To me there’s even a strong basis, and you have people protesting.
2. What Central Banks are doing have been proven to be a failure again and again, but there’s zero protest.
Talk about a nation that has its priorities wrong.
Yeah no joke…everyday Karen is busy protesting wearing mask to go into Costco or Trader Joe’s. Feels like this nation or majority of the people just can’t seem to see the forest for the trees. Protest over things that don’t matter and completely blind to the bigger systematic failure and root of the problem.
I guess part of the reason is when you have a failing education system, one that doesn’t nurture critical thinking and questioning, people don’t even know how to ask or where to look to get to the source of the problem. Instead they get manipulated into blaming the straw man while the elites in charge sneak out the back with all the loots. A pandemic this scale is like a once in a lifetime opportunity for these oligarch to loot with no strings attached, shock doctrine in action. Even better opportunity now for them to completely cut social security and medicare..oh how will we ever pay for all that in the future? A question that no one asked when we pumped trillions in matter of a month or two..
China and the CCP will pay for all of it.
The one thing that I have learnt is that it’s not enough to be “educated”. You have to want to be educated. This does not mean that you are the hardest working person in school, but it’s some sort of innate desire to explore the world, its assumptions and its inner workings and not just accept things as they are but rather how they came to be. And it’s also not sufficient to apply those principles to your chosen profession, but also to yourself and society at large.
Quite true: my siblings are all university- educated with multiple degrees, but utterly lacking in that essential spark of curiosity.
For them, education was merely a matter of doing coursework sufficiently well to attain the necessary grades to get their state jobs.
And once your desire to delve into stuff and see what’s behind it bears fruits, and all the greed, selfishness, short sightedness and stupidity that rules us becomes revealed, then maybe you end up wishing you’d just taken the couch potato route through life instead?
what a brilliant and honest post – thank you !
As someone who went to university later in life and went from undergrad to PhD and then researcher i can confirm that a lot of people at university, even at PhD level are not able to think and actually solve problems. In fact I met people who were way above the intelligence of university PhDs who worked in a factory with little to no qualifications.
@Saltcreep, a life that you can get behind because you know its underpinnings is probably a life worth living. If being a couch potato is the result of not wanting to harm other people, then why not. It’s a different matter if you are doing it just because you are lazy.
In our society, doing is always better than not doing, so basically polluting the environment, lobbying the government for bailouts, doing sh***y PE deals, cooking up hair brained derivatives, those are somehow viewed more positively than let’s say a “couch potato”.
Nick reported: “On May 20, Bailey told British MPs that the BoE is refusing to rule out cutting the benchmark interest rate below zero”
so exactly how ould that work? the BofE put’s it’s benchmark in negative territory. Then what?
does that mean an Englishman can go to a bank, take out a loan, and get paid to do so?
There seems to be much hype to this negative interest rate stuff. Who is going to pay to loan money. I am aware there are laws that require certain institutions to hold an amount in sovereign debt; but how long before that law is ignored or changed with the imposition of negative interest rates?
And how does it affect banks? Who believes a bank will pay you to take out a loan? It’s about the spread, and banks will adjust accordingly. And if the actions of the Central Bankers stresses the banks, good. They have already stressed the hell out of savers.
I’ve been watching some of these hedge fund managers squak about the abandonment of Capitalism. I wonder at what point society bought the claptrap that money managers, traders and other financial engineers were capitalists? From my vantage they just swap paper.
Add the fees, fleece the pleebs and it is “capitalism.” Pleebs have nowhere else to go, so they pay the fees and eat the moldy cheese. Money managers, traders and financial engineers move it around for a healthy salary. NIRP, ZIRP, BURP. They will be fine despite their protests.
Initially this is about you “investing” your savings in conservative ultra-safe bonds. You lend a government $100,000 and ten years later (no coupons) they give you back principal of $98,000. Or, they could take your $100,000 and require you to make quarterly payments to top up your loan. Then there’s adding a NIRP to TIPS that are already negative. This circus may need more rings, but it’s always entertaining.
looks on as yet more central bankers and govnmints just run out of ideas and resort to the failed policy of other banks, i suspect the future is deflation, we are turning japenese, followed by turning american and a re-run of seventies stagflation, brace yourself.
Quote from homeowner in 2025:
Yeah so I lost my job during the Covid depression, which really sucked, but fortunately I was able to get a repayment suspension from the bank and have been living off the interest earned on my mortgage since then. It would be great to still have a job, but as long as house prices keep going up, I’m doing okay and I’ll be able to sell up and downsize when I get to retirement age. Hopefully rates go more negative next year so we can afford a few more holidays.
The big banks and the rich who are well connected will absorb all positive advantages of negative interest rates. Just, because, big banks get negative interest rates, doesn’t mean the average person will. Negative 3% for them, positive 3% for you.
Central Banks are trying too hard…….chill. The junk bond bubble burst. Just accept and move on. You can’t stimulate economies soundly. You frankly were never designed for that. Where did this attitude come from, I have no clue. They make market economies look weak by acting weak.
At some point in this Ponzi scheme, governments desire to borrow at no cost will become more important than the concerns about bank profits.
In the late stage, the government will be so desperate, they will even screw the bankers too!
The lockdown’s doing wonders. We finally have birds chirpin’ and central banks NIRPin’. The Fed’s skirtin’ but they know it’s lurkin’. The Orange Man’s smirkin’ but banks be irkin’. The working class be workin’ but their savings accounts and pensions be hurtin’. And I need to go back to workin’….
This is what total, utter… desperation. Looks like
Here we are on May 23 and 7 million in Italy still haven’t received their unemployment benefits for April. Granted, a few millions of them are now back to work but remember those working reduced hours can still draw some benefits: for example if an employee is on a 40 hours/week minimum contract and works only 30 hours he will be partially compensated for the lost 10 hours. It’s not much but it helps.
The money is just not there: our welfare systems have completely collapsed.
On top of this all European countries have pledged enormous stimulus and aid packages worth well north 10% of their pre-crisis GDP. Again, the money is just not there to keep even a small fraction of the promises. Even the much advertised (but still inexistant) EU Recovery Fund has already shrunk in theoretical size from €1 trillion to €500 billion. The ECB is extremely reluctant to do anything more than keeping yields from blowing up and so far no amount of pressure from Berlin and Paris has been enough to make them change their minds.
Politicians created this catastrophe, and now they are desperate to avoid paying the bill: the lockdown zealots (a rapidly dying breed here in Italy) won’t be enough to save them from a mass of infuriated taxpayers and voters.
To add insult to injury, while the spectre of another lockdown is an ever-present threat (and the reason why hair stylists and barbers have a waiting list a mile long but realtors and car dealerships are singing the Blues) Europe’s semi-nationalized airlines have announced to much fanfare big plans to resume service. Actually Air France, which is at the receiving end of a €7 billion bailout (which will be delivered no matter what), resumed dozens of internal and international routes on Wednesday already, almost three weeks ahead of the earlier schedule.
Alitalia will resume “regular service” between Rome and New York in under three weeks, again ahead of the previous schedule.
Our politicians took probably half an hour to clear operations between their countries, and green-lighted regular flights from Iran (a country whose internal Covid-19 situation is a big unknown) in late April already.
But they are engaging in a complicated nô play to keep internal EU borders well sealed for purely political reasons. Gotta keep those sweet tourist euro at home and teach the neighbors a lesson.
The thing I do not fully understand is why CBs are so afraid of asset deflation. The 1% already own almost everything worth owning (real estate, business, etc). If there is deflation, won’t they still own everything worth owning?
Yes Joe, they will still own everything, as has always, or almost always been the case since the kings literally owned us all.
Then the strong knights, pope,etc., made the king share a little of us with the lords, ladies, and priests BY THE SWORD.
Then the banksters got to work and made the kings, lords, and ladies share a little of us BY THE LAWS of lending with interest, foreclosure, property deeds, etc., BACKED BY THE SWORD.
The lords and ladies do not keep their wealth in the form of money except for the chump change they need for short term purchases, etc.
Money is a temporary measurement of wealth, and the reason that the oligarchs don’t want deflation is that it makes the wealth of WE the PEED ON go up by making our money more valuable instead of less valuable.
The degradation of our money, AKA inflation, is designed to keep us just as poor and obliged as we have been since we were serfs owned by the king, and it has worked exactly that way for most of us, hence we are called, ”wage slaves” now, instead of just slaves or serfs or peasants as we were formerly called, perhaps a bit more honestly.
Each and every time WE the PEEDONS get a ”raise” the inflation that ensues reduces the value of our money right back to what it was before the raise, while the lords and ladies wealth, not held as money, retains the value it had before, and is now worth more money, since the money is worth less, AKA ”worthless.”
Hope this answers your question. Wish I were being snarky.
You are a wise man VN. The more I read you the wiser you become. I hope to meet you at a Wolf rally.
I see natural processes behind the inflation.
Your wealth consists mostly of perishable goods, even houses are being physically damaged every year by the Time itself.
Meanwhine the gold is eternal, the money – as a convention – is eternal too.
So if you produce nothing for some period of time but keep the monetary base, you get inflation by the physics of our universe.
You keep them stupid, I keep them poor, said the king to the pope.
Page rushing into the King’s chamber,
“Your Highness, the peasants are revolting!”
King looking down over a parapet,
“They certainly are!”
All true. But good reading, too. :)
Each and every person who implements zero interest rates should work for zero pay.
Each and every advocate of negative interest rates should be required to work for negative pay, and pay money to whom they work for.
Of course, if they refuse to pay their negative pay, that would be loan and they could earn negative interest on that…but that’s another matter.
And those folks in Japan and Europe. Like that convicted criminal who ran the IMF and has skin that makes her look like she has liver cancer should also retroactively do negative pay. And that “whatever it takes” Draghi dude. Why, they probably own who they worked for millions.
I’ve been debt free for decades and have considerable saving. I just wish Jeronome would stop stealing my interest and giving my income to folks like Boeing CEO who committed manslaughter and was never prosecuted. Like Jamie Dimon who fraudulated mortgages and was never prosecuted.
Why can’t I steal Jerome Powell’s money and not be prosecuted?
It’s only fair that I be allowed to.
Cuz then you would be one of them in you would find it hard to live with yourself.
Most days I count the natural blessings and loved ones which surround me and I’m thankful I do not have the moral / ethical / soul-less challenges of the Oligarchy.
Here in Canada on April-30-2020 our CDIC, bank deposit insurance now covers terms greater than 5 years for GIC’s, RRSP’s, RRIF’s, TFSA’s basically all fixed rate guaranteed deposits.
I just had my RRSP’s, TFSA’s, GIC’s all locked in for 10 years at 2.45% equitable bank $235,000 total here. I too have considerable savings, another $600,000 in OSB’s Ontario savings bonds 2.85% 10 years mature in 10 years now 8 as 2 years gone by.
Any money i have left over will never go into negative interest rates, i will either invest in other currency fixed rate deposits or buy high quality gold coins. There is already taxes and inflation 2 thieves on money.By charging interest on your own savings they are not capitalists but communists and that is how people should describe them with negative interest rates.
Capitalism does not make you pay interest to have your own savings. It is communism that steals all your money and more and not just your money, your life, time, freedom too. Negative interest rates is nothing really new, it is stealing by a so called new name. The territory of stealing has been gone since the time of man was put on this earth. This is thievery and they steal people’s savings, just tell the way it is.
dont negative interest rates help the govt in paying back its debt with inflated currency, and also help the 1% to increase their asset prices and hence buy off more politicians and control more of the media?
The underlying problem is not the negative interest rates, it is the decision, made decades ago, to force what were then described as “Savings Institutions”, to hold much greater, and increasingly greater . . . volumes of government debt; to the point where the entire savings and insurance industries are subject to those rules and have no other means of income sufficient to enable their normal day to day expenses. Until everyone recognises the need to return to where all such “institutions” were able to pay their way, without recourse to such debt; originally gained from being able to hold the majority of their income generating investments that are not subject to “interest rates” imposed by a central authority . . . nothing will change.
Perhaps we are past the point of return on that.
Widespread debt jubilee, sovereign debt default or inflate out of the wazoo.
Perhaps we’ll just go for what’s the most messy.
The real underlying problem is Friedmaniacs. They are the ones who made that poor decision. Friedman’s brain fart has destroyed capitalism.
Negative interest rates sounds like something out of Modern Monetary Theory.
Question about both: if the ideas are valid. why should a counterfeiter be considered a serious criminal and not a benefactor? For debate’s sake assume he is competent and his notes are indistinguishable from CB notes. Obviously he will do well out of his efforts, and make a living but so does the CB. The Fed via the US Mint makes $98 every time it prints a $100 note. Assume also that he is not joined by a legion of imitators and does not create so much product that people want more and more of it in return for goods.
As soon as he spends his product it enters the economy to circulate over and over creating enough real goods or services to justify the initial ‘fraud’. He would be a modern Robin Hood ( who also made a living) fighting the parsimony of any CB like Germany’s which needlessly obsesses about deficits.
I do not subscribe to this theory but would like to hear the objections of the MMT theorists, if they object.
The counterfeiter’s money would likely end up being spent on real goods and this would be inflationary.
Look at a chart comparing money supply to velocity, someone described this chart as going “spread-eagle”. Supply to the moon and velocity in the toilet, it’s NOT a new situation either, just new extremes.
Mr. Richter, I suppose at zero or negative interest rates one would be better off putting it under the mattress…
Yes, but once there is enough money involved, this makes for a very lumpy sleep :-]
“So what if negative rates have never worked? We’ll still use them”
How can such highly educated people be so dumb?