The old negative interest rate thing again

[Simpo Two]

BoE has been asking banks what they think of the idea. The basic summary, according to R4 'Today', is that savers would have to pay for banks to hold their money, but that banks would pay them to borrow money. It seems highly unlikely to me that the second part of that would happen, but if it did, surely you just borrow £1M and live on what I might call 'reverse interest' Meantime what you do with the £1M is up to you - under the mattress, luxury yacht or invest.

R4 also said that parts of Europe have had -ve rates for six months. What is the actual everyday change, if any, on the people there? Are they all buying Lambos or is it basically life as usual?

How is the average investor here likely to be affected?

[emicen]

Sounds like Radio 4 ought to attempt to understand policies better themselves before incorrectly explaining it to others.

https://www.reuters.com/article/us-ecb-policy-rate...

Unless you are exceedingly wealthy, hence have a ‘serious’ wedge on deposit, the impact would likely be next to nothing.

For Joe Bloggs borrowing or mortgaging, very little. Pension funds with large cash reserves, it can hurt them.

Paid to borrow is a lovely dream, but that’s about the sum of it, it’s a dream.

[eyebeebe]

We’ve had it in Switzerland for a few years now. Retail accounts are protected from being charged negative rates. HNW accounts (normally above CHF 1,000,000 balances) and corporate accounts are charged though (negotiating skill dependent). Definitely no negative interest mortgages or loans though, although mortgages are getting closer and closer to zero at ever longer fixes.

[CzechItOut]

I worked for a major retail bank post-2008 and we looked into this. The general consensus was that cost of implementing the changes involved to charge a fee wouldn't be worth it, so the bank would simply swallow the costs.

The second part about being paid to borrow is also a none starter. You might get a few specialist small lenders offering a teaser rate on very small loans, but you won't be able to borrow a million quid and make a profit.

[Simpo Two]

Thanks for the replies. So it seems that for the average Joe, or even a moderate investor like people here, it will make little or no difference.

Whether it will have any positive effect on the economy as a whole, who knows. What does the panel think?

[stongle]

CzechItOut said:

I worked for a major retail bank post-2008 and we looked into this. The general consensus was that cost of implementing the changes involved to charge a fee wouldn't be worth it, so the bank would simply swallow the costs.

The second part about being paid to borrow is also a none starter. You might get a few specialist small lenders offering a teaser rate on very small loans, but you won't be able to borrow a million quid and make a profit.

Interbank and wholesale market has been -'ve for years in Eurozone. Paying people to take cash of your hands (at ever increasing cost) has long been the function of a "normal" market.

Even corporates lend at -'ve rates (better than sticking it in the bank on deposit and getting fully lit up with -0.5% - whatever the ECB rate at the time was). Renault was pretty early to that party, rather than depot cash at their correspondent banks @ -0.5% they went into the Repo market and got collateral (in return - so mitigating bank risk) AND only paid 0.25% to lose the cash (an opportunity cost saving of 25bps).

The only people it won't effect is retail (below a certain threshold). Just expect to lose free banking (which never existed anyway - nearly ALL deposit taking business is a loss).

[stongle]

Simpo Two said:

Thanks for the replies. So it seems that for the average Joe, or even a moderate investor like people here, it will make little or no difference.

Whether it will have any positive effect on the economy as a whole, who knows. What does the panel think?

Its an extension of low interest rate environment or expansive monetary policy. Arguably, the UK has benefitted from this approach for years (asset price boom in property, equities etc).

Going into negative territory SHOULD (theoretically) push more cash into the market (thus creating inflation) - but it's should only be a short term measure.

The eurozone has been at it for 8 years, and its probably fair to say been significantly less successful in creating inflationary effect. The reasons being are long and often boring (and challenging dependent on where you sit on Brexit etc) - but monetary policy NEVER existed in a vacuum, and its NOT the opposite of fiscal multiplier.

There are lots of dangers going negative for long periods of time, mostly you create zombie companies dependent on cheap money to survive. It should be an inflationary shot into the system kick starting business growth, employment and wage inflation (although the balance between pure inflation and employment / payrolls is now being looked at for mandate change by many central banks).

[Simpo Two]

Thank for that good summary.

To use an analogy - the ship is sinking so we're finding more stuff to throw overboard? This has been going on for years. What's the endgame? Can everything we know go 'phut' in a cloud of smoke that makes 2008 look like a day at the beach?

[BrundanBianchi]

Simpo Two said:

Thank for that good summary.

To use an analogy - the ship is sinking so we're finding more stuff to throw overboard? This has been going on for years. What's the endgame? Can everything we know go 'phut' in a cloud of smoke that makes 2008 look like a day at the beach?

To cut a long story short, yes. This will make Japan’s ‘lost decade’ look like a picnic. The world’s governments are kicking the can down the road, there’s only a finite amount of road.

Edited by BrundanBianchi on Monday 12th October 14:06