As The Guardian and many other newspapers reported yesterday, the Bank of England yesterday announced that it was preparing the ground for negative official interest rates within six months.
As the Bank has suggested, this does not mean that there will be negative rates. But unless they allow for the possibility if that now they will, as they admit, restrict their policy options. In that case this announcement has to be seen as creating the possibility of negative nominal interest rates.
There are a number of things to say.
The first is that this announcement is hardly surprising. There has been a strong, downward, trend in interest rates for 500 years now, which has in the last decade seen them head to around zero. Given the trend, negative rates are the next place to go. Other countries, such as Denmark, already have.
Second, this is no shock to financial markets. Government bonds are already being issued at real negative interest rates i.e., after many years of tying up their money the investor will get back less than they put in. All they are doing is paying the price for security that the government provides.
Third, consumers are also already familiar with negative interest rates. Anyone holding cash now is seeing its value fall in real terms. But again they are buying the security that only a government guarantee on their deposit can provide.
Fourth, the policy is hardly surprising. That's because savings are sky-rocketing. For those who think this is because of Covid that is, at best, only part of the story. The real one is that if the government runs a deficit (and it is), and injects new money into the economy as a result (and it is) then someone has to hold that new money on the other side of the double entry equation. And since every borrower (and the government is technically that, albeit in a very special way) requires a lender. In this case means that as cash is being injected someone must hold it, in the form of savings. And in that case the government wants to cut the price paid on cash.
Fifth, there is good economic reason for trying to force cash out of the unproductive economy where it is sitting right now. As I have said time and again on this blog, saving is a pretty economically useless activity at the macroeconomic level. It may be personally important (which I will not dispute) but at a macro level it just withdraws money from the economy and reduces the scale of economic activity. The latter is especially true since the link between savings and investment is now very largely broken. Banks, we now know, do not lend out depositors' money. And money in the stock market is not used to fund new share issues, and so has no relationship with investment. In that case, of course the government wants negative rates: it wants to encourage this money out of saving and into use.
Sixth, it is an unfortunate fact that this will not work. As I have already noted, in practice we already have real negative interest rates. There is nothing new then about this policy. And since existing negative rates have not stopped people saving, making such rates official will have little macro impact. After a crisis people are cautious. They are willing to pay the price of a government guarantee. And if that is a negative interest rate, so be it. I suggest that will continue to be true for several years based on past trends.
My suggestion is, then, that the Bank can try this policy but it will be a vain attempt to stimulate the economy that will not succeed. Much more radical thinking is required to achieve that. I will address that in another post, soon. I will link it when it is up.
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More of the same (ever lower rates to force people to do something with the cash) will just produce more of the same result. Either people will invest in other existing assets or, if they are old and cautious like me, just grumble and live with it. Neither has been (or will be) effective in generating growth, jobs and general well-being.
Actually, I think it is unlikely we will go to negative rates.
First, I DO believe the BoE when they say that they want the system to be ready “just in case”. Many IT systems are old and unable to handle negative rates.
Second, interest rates being too high is not the problem – and I think we all know that now (even the BoE). Indeed, asset price bubbles are probably more of a concern.
Third, countries with negative rates have not fared any better than those with zero/positive rates.
Fourth, negative rates is dreadful for banks….. and our banking lobby is strong.
At the risk of repetition…. bring on Green Gilts to fund productive investment in things that we desperately need.
Don’t steal my thunder…… 🙂
A further consequence might be more people putting their cash into buy to let further inflating that market. This might be a problem for generation rent if rights are eroded and standards fall.
@ Nicholas,
Inflating house prices is one very real problem ,the other being it will also have many flocking to buy shares to seek a return and that seldom works well either.
The govt did a very strange thing last year. It set a target of £35 bn investments for the NS&I govt owned savings bank. It left its income bond rate at attractive 1.15%, only to bizarrely then pull that down to a measly 0.1% before Christmas. Not surprising the result was a mass exodus and they are now saying they fall short of that target by £9.5 bn.. I recall with the head of NS&I admitting that they had maybe “overdone ” it. No wonder people lose faith with governments when they are run like this.
https://www.theguardian.com/business/2021/jan/22/nsi-boss-apologises-for-customer-service-amid-rise-in-withdrawals
NS&I is a massively under-rated facility that the government very clearly does not understand
I cant see the BoE actually doing this either. A lot of what central banks do now is about “forward guidance” so I think we have to take that into some account here. Beetle Bailey has gone on record saying he was not contemplating negative rates, so he for one would have t make a U turn on that. Which would not be good for his image…such that it is.
I think some in the MPC may think it is needed, but it could be that the BoE are just setting everyone up to expect very low interest rates for a very long time ,so when they announce that negative rates will not happen in 6 months time,everyone will give a sigh of relief and say well at least we still get some interest on our savings. Everyone will the be happy with the meagre return they will be getting, so it serves a purpose that way.
I would add that should this happen, banks and building societies would probably be loathe to charge savers for holding their money and they would slap the costs onto mortgages. I doubt the govt would really want that either.
All in all the govt would be better advised doing as you say, increase spending on good causes ,increasing employment and putting cash in peoples pockets at the lower end of the scale, those that don’t have savings.
If I borrow £1000. Do I pay back £990?
Sorry. But..
If I might ask Richard.
What did make of the votes.
In Denmark there are mortgages with negative interest rates
Presumably if you borrow £1000 and only pay back £990, the bank still makes a profit if it gets back £995 on the £1000 government bond it holds.
New Info.
Do you know how they work?
Do they just disappear?
It is quite, Land Value Tax ish?
Sorry – I cannot see what you are responding to when I moderate and so cannot follow this
A negative interest rate is in effect a type of wealth tax. So how come this tax on wealth is OK but an actual declared ‘wealth tax’ is not? Perhaps because the bonds and cash deposits that will be affected are mostly held by pension funds, pensioners and the like while billionaires mostly have shares, property, and other non-cash assets?
Why if ‘interest rates are almost zero’ do credit cards and store cards have rates that are anywhere from 10% to 30%? That does not encourage any consumer spending.
The latter is claimed to be a charge for default risk
Echos my response when I read about this yesterday, but more well-informed. Mine was just – it won’t work. Thinking about my own position, I would be happy to spend my savings but feel that this would be imprudent in a society that embraces the idea that individuals should shoulder all the risks. I’m not particularly wedded to materialist stuff. Food, warm shelter, friends and access to internet would pretty much do me. But, I have a strong fear of ending up as a bag lady if I don’t hang on to my savings.
At a more general level, savings are not evenly distributed and tend to accumulate with those who have all they need, so no pressure to spend.
You are not alone
And within this environment, we still have the puzzling? derisory? spectacle of Anneliese Dodds wittering on about the dangers of inflation. What can one say?
@ Andrew Dickie
“And within this environment, we still have the puzzling? derisory? spectacle of Anneliese Dodds wittering on about the dangers of inflation. What can one say?”
She missed her forte should be in pantomime!
No amount of empirical evidence to the contrary ever silences the indefatigable, tiresome cry of the inflation chicken-hawk.
In the UK for a variety of reasons there’s been a lack of sufficient investment in both the real private and public economy for decades hence the high levels of poverty. So why should we not think negative interest rates wouldn’t simply result in more asset bubbles being blown?
In particular making the five decades long private house price asset bubble even larger and pricing even more young people out of the housing market forever and making the million applicants long housing waiting list even longer!
I see all the risk of this
So lets say banks go with a 1% negative rate and folk say well bugger that and withdraw surplus requirements from there account, secondly would the move be detrimental for the banks.?
The banks have no choice but hold £800 billion on deposit right now with the Bank of England so this would really cost them
Would deposits leaving matter? Not much because they are at present laden with them
But let’s also be clear – people will not leave
While there are clearly issues about ‘savings’ the issue we are not addressing is the very high percentage of households who have nowhere near enough savings and for whom things like car repairs or breakdown in their ‘white goods’ is a major disaster.
While some sort of savings products aimed at them would be a good idea they really need a higher income, that means a rise in the minimum wage and tackling high housing costs. Not only that but the bottom 3rd or so of the population will spend almost all the extra money they ge, not because they are imprudent but because they have no option but to spend.
I am working on this…
[…] By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK […]