Negative deposit. Negative real rate Can interest be negative?
The Rixbank, Sweden's central bank, was the first central bank in the world to introduce negative interest rates on bank deposits in July. The phenomenon is quite remarkable in itself, but at the moment it is more interesting because other countries that want to achieve an increase in lending volumes may follow Sweden’s example, writes the Financial Times.
The world's central banks are closely monitoring " Swedish experiment" Governor of the Bank of England Mervyn King hinted that his department may well follow the Swedish example, since the threat of a liquidity trap for the UK (money “stuck” in the banking sector and not flowing into the real economy) is too great.
“If there are no signs of an end to this trend in the coming months, the Bank of England may resort to negative interest rates. In essence, this is a fine for banks that refuse to issue loans,” said a representative of RBC Capital Markets John Reith.
However, the European Central Bank is unlikely to charge banks for deposits, experts believe.
Frightened by the financial crisis and the defaults of their clients on debt obligations, banks are in no hurry to issue new loans, but prefer to accumulate money. Deposits with the Central Bank are considered one of the safest options.
Previously, it was expected that Japan would be the first to resort to such a measure, however, even having reached the bottom of the crisis, the Bank of Japan did not dare to force banks to pay for placing deposits.
The Riksbank's key interest rate, the repo rate, is 0.25%, the rate on loans issued by the Central Bank is 0.75%, on deposits - minus 0.25%.
The most vocal supporter of negative rates in Sweden is the Deputy Governor of the Riksbank Lars Svensson, a recognized expert on the theory of monetarism, who works closely with the head of the US Federal Reserve Ben Bernanke, with whom they worked together at Princeton. However, in the United States, the possibility of introducing negative interest rates is almost not discussed, since the very idea of this is alien to American economists, the article notes.
“There is nothing strange about negative interest rates,” says Svensson. He is convinced that for central banks it is a monetary policy tool like any other, they just need to know when to use it.
Experts note, however, that Swedish banks have traditionally not used the opportunity to place funds with the Central Bank as widely as in other European countries, so the effect of a negative rate is limited. In the UK, it will be more noticeable, since the volume of deposits of commercial banks with the Central Bank increased almost fivefold from March to the end of July - from 31 billion to 152 billion pounds sterling.
Why do ordinary people like scary movies so much? It turns out that this is an opportunity to pretend to relive your fears, become more confident and even let off steam. And this is true - you just need to choose an exciting horror film that will make you really care about the heroes.
Silent Hill
The story takes place in the city of Silent Hill. Ordinary people wouldn't even want to drive past it. But Rose Dasilva, little Sharon's mother, is simply forced to go there. There is no other choice. She believes that this is the only way to help her daughter and keep her out of the psychiatric hospital. The name of the town did not come out of nowhere - Sharon constantly repeated it in her sleep. And it seems like a cure is very close, but on the way to Silent Hill, mother and daughter get into a strange accident. Rose wakes up to find that Sharon is missing. Now the woman needs to find her daughter in a cursed city full of fears and horrors. The trailer for the film is available for viewing.
Mirrors
Former detective Ben Carson is going through hard times. After accidentally killing a colleague, he is suspended from the New York Police Department. Then the departure of his wife and children, an addiction to alcohol, and now Ben is the night watchman of the burnt out department store, left alone with his problems. Over time, occupational therapy pays off, but one nightly round changes everything. The mirrors begin to threaten Ben and his family. Strange and frightening images appear in their reflection. To save the lives of his loved ones, the detective needs to understand what the mirrors want, but the problem is that Ben has never encountered mysticism.
Asylum
Kara Harding is raising her daughter alone after the death of her husband. The woman followed in her father’s footsteps and became a famous psychiatrist. She studies people with multiple personality disorder. Among them there are those who claim that there are many more of these individuals. According to Kara, this is just a cover for serial killers, which is why all her patients are sent to death. But one day the father shows his daughter the case of the tramp patient Adam, who defies any rational explanation. Kara continues to insist on her theory and even tries to cure Adam, but over time, completely unexpected facts are revealed to her...
Mike Enslin doesn't believe in an afterlife. As a horror writer, he is writing another book about the supernatural. It is dedicated to poltergeists living in hotels. Mike decides to settle in one of them. The choice falls on the infamous room 1408 of the Dolphin Hotel. According to the hotel owners and city residents, evil lives in the room and kills guests. But neither this fact nor the senior manager's warning frightens Mike. But in vain... In the issue the writer will have to go through a real nightmare, from which there is only one way to get out...
The material was prepared using the ivi online cinema.
There is increasing talk in the media about negative interest rates. How effective this approach can be, since there is great uncertainty about the consequences for commercial banks, organizations and other economic entities and their behavior.
Many developed countries around the world are entering the realm of negative interest rates. Five central banks - the European Central Bank (ECB), the Danish National Bank, the Swiss National Bank, the Bank of Sweden and the Bank of Japan - have already introduced negative rates on commercial bank funds held in deposit accounts at the central bank. In fact, commercial banks must pay to store their funds with central banks. The main goal of these decisions is to stimulate economic growth and combat low inflation and the growing threat of deflation.
Why use negative interest rates?
In simple terms, with negative rates, a depositor, such as a commercial bank, must pay the central bank to store funds at the government-owned central bank. What is the purpose of such a policy? Once banks had to pay to hold their cash, they would be incentivized to lend any additional cash to businesses and individuals, fueling the economy. Another example would be a depositor (such as a large company) who must pay to hold funds with a commercial bank if the latter uses negative rates. In this case, one goal would be to encourage companies to use the money to invest in businesses, again to increase economic growth. That is, negative rates imply that lenders pay borrowers for the privilege of making loans. However, this would be an extreme case at the commercial bank level, since the economic logic of lending is to earn interest in exchange for taking on the borrowers' credit risks. However, borrowing is limited by the use of negative interest rates, and the goal is to promote consumption, one of the main engines of economic growth. So far, the listed goals and intentions for negative interest rates are very theoretical, and there is uncertainty about their implementation in practice.
Eurozone example
In the eurozone, the central bank's goal is to stimulate economic growth and increase inflation. The ECB must ensure price stability by keeping inflation below 2%, and at the same time as close to this figure as possible, over the medium term (currently inflation in the eurozone is slightly below zero). Like most central banks, the ECB influences inflation by setting interest rates. If a central bank wants to take action against too high a rate of inflation, it basically raises interest rates, which makes borrowing more expensive and makes saving more attractive. Conversely, if he wants to increase inflation that is too low, he lowers interest rates.
The ECB has three main interest rates at which it can operate: margin lending for providing overnight loans to banks, main refinancing operations And deposits. The prime refinancing rate or base interest rate is the rate at which banks can borrow regularly from the ECB, while the deposit interest rate is the rate that banks receive on funds deposited with the central bank.
With the eurozone economy recovering very slowly and inflation close to zero and expected to remain well below 2% for a long time, the ECB decided it needed to cut interest rates. All three rates have been falling since 2008, with the most recent cut being made in March 2016. The prime rate was cut from 0.05% to 0%, and the deposit rate went further into the negative from -0.3% to - 0.4%. The ECB confirms that this is part of a set of measures aimed at ensuring price stability over the medium term, which is a necessary condition for sustainable economic growth in the euro area.
The deposit rate, which has become even more negative, means that eurozone commercial banks that deposit money with the ECB must pay more. The question may arise – is it impossible for banks to avoid negative interest rates? For example, couldn't they just decide to hold more cash? If a bank holds more money than required for minimum reserve purposes, and if it is unwilling to lend to other commercial banks, then it has only two options: keep the money in an account with the central bank or keep it in cash (of course the most expected option by central banks is that banks will increase lending to businesses and individuals). But storing cash is also not free - in particular, the bank needs a very secure storage facility. Thus, it is unlikely that any bank would choose such an option. The most likely outcome is that banks will either lend to other banks or pay a negative deposit rate. Between these two options, the second one seems more realistic, since at the moment most banks hold more money than they can lend, and it is not necessary to borrow from other banks.
The opposite effects of negative rates
As central banks aim to boost economic growth and inflation through negative interest rates, such policies are becoming increasingly unusual and raise questions worth considering. Below are some of the main pros and cons.
Firstly Given that central banks' intentions are being met and negative interest rates are stimulating the economy, this would be a positive sign for the banking sector. If markets believed that negative interest rates improved long-term growth prospects, this would increase expectations of higher inflation and interest rates in the future, which is beneficial for banks' net interest margins (commercial banks make money by taking on credit risks and charging higher interest on loans than they pay on deposits - in this case they have a positive net interest margin). Moreover, in a stronger economy, banks would be able to find more profitable lending opportunities, and borrowers would be more likely to be able to repay those loans. On the other hand, negative interest rates could harm the banking sector. If the lending rate is constantly kept lower due to falling interest rates, and commercial banks are unwilling or unable to set the deposit rate below zero, then the net interest margin becomes smaller and smaller.
Secondly, a negative interest rate policy should encourage commercial banks to lend more to avoid central bank charges on funds that exceed reserve requirements. However, for negative rates to encourage more lending, commercial banks would have to be willing to make more loans at lower potential earnings. Since negative interest rates are introduced as a counterbalance to slow economic growth and the risks of deflation, this means that businesses need to solve problems arising in this area and, as a result, banks face increased credit risks and reduced profits at the same time when lending. If profit levels suffer too much, banks may even reduce lending. Moreover, the difficulty of setting negative rates for savers could mean higher debt costs for consumers.
Third, negative interest rates also have the potential to weaken a nation's currency, making exports more competitive and increasing inflation as imports become more expensive. However, negative interest rates can trigger a so-called currency war - a situation in which many countries seek to deliberately reduce the value of their local currency in order to stimulate the economy. A lower exchange rate is clearly a key channel through which monetary easing operates. But widespread currency devaluation is a zero-sum game: the global economy cannot devalue money itself. In a worst-case scenario, competitive currency devaluation could open the door to protectionist policies that would negatively impact global economic growth.
Fourth From an investor's perspective, negative interest rates could, in theory, serve the same function as cutting rates to zero - this could be beneficial for exchanges since the relationship of interest rates to the stock market is quite indirect. Lower interest rates imply that people looking to borrow money can enjoy lower interest rates. But it also means that those who lend money or buy securities such as bonds will have less opportunity to earn interest income. If we assume that investors are thinking rationally, then falling interest rates will encourage them to take money out of the bond market and put it into the stock market.
But in practice, this particular policy of negative interest rates may not be so useful. Investors may view negative interest rate policies as a sign of attempts to sort out serious problems in the economy and remain risk averse. Also, the use of negative interest rates will not necessarily encourage commercial banks to increase lending, which will make it more difficult for financial companies to make profits in the future and harm the performance of the global financial sector. Problems in the financial sector are very sensitive for the entire stock market, and they can weaken it. And even if commercial banks wanted to increase lending, success in encouraging businesses and individuals to borrow more money and spend more is questionable.
Fifthly, negative rates could complement other easing measures (such as quantitative easing) and signal to the central bank the need to address the economic slowdown and missed inflation target. On the other hand, negative interest rates could be an indicator that central banks are reaching the limits of monetary policy.
Main conclusion
Central banks are determined to do everything possible to increase economic growth and inflation. With interest rates already at zero, an increasing number of central banks are resorting to negative interest rates to achieve their goals. However, this is a relatively new tool for them, and the main opportunities and risks of such a policy have not yet been realized. Therefore, it is worth taking a closer look at and monitoring the unintended consequences of these increasingly popular policies. Currently, the eurozone economy is gaining momentum slowly, inflation is low, commercial banks are in no hurry to increase lending volumes, but instead are looking for other ways to reduce the potential damage to profits, the desire of businesses and individuals to take out more loans at a lower interest rate is growing quite slowly, investors are not rush to take on more investment risks, bond yields remain at record lows. Negative interest rates will take longer to realize the full impact.
Gunta Simenovska,
Head of Sales Support Department, Business Development Department, SEB Bank
Sources: European Central Bank, World Bank, Bank for International Settlements, Nasdaq, Investopedia, Bloomberg, BBC, CNBC
At first glance, the policy of negative interest rates (NIRR) looks like a paradise for both the population and business.
Which of us would refuse a loan at, say, two percent per annum? If you take out a mortgage at this percentage, and even for 30 years, it turns out that buying an apartment will cost much less than renting. It would seem how great it would be to live in the West, where mortgages are often issued at such low rates!
Experience, however, has shown that low interest rates have worked in the opposite way in the United States and Europe, making housing unaffordable for a record number of citizens.
The “paradox” is explained simply: the lower the loan rate, the more citizens can spend on apartments. Since there are a limited number of apartments, their prices are rising. Well, as prices rise, buyers with average incomes find themselves left out, since not every American can afford to buy a house made of sawdust for a million dollars.
To illustrate the problem, it is enough to mention a couple from San Francisco who semi-legally rent out container cabins to those residents of the city who do not have two or three thousand dollars to rent at least some apartment. For the opportunity to live in a metal container, the unfortunate people pay $600 a month.
Low interest rates and pension funds are killing: you can now invest money in reliable dollar securities only at zero percent per annum. This, of course, is not enough for normal functioning, so pension funds in the United States now have to either cut pensions or gamble, investing, for example, in bonds of Tajikistan and Ecuador.
However, the real sector of the economy fares the worst. It would seem that cheap loans are a businessman’s dream: you can quickly expand production and easily close any cash gaps. However, in practice, it turns out the same way as with a mortgage: it turns out that cheap loans are only good if you have access to them, and your competitors do not.
A capitalist economy operates through a few simple mechanisms, the main one being competition. Bad businessmen take losses and leave the market, leaving the best on the playing field: those who make dollars and ten cents out of a dollar every year. Banks should speed up the process of selecting the best by providing loans at 6-12% per annum.
This system of natural selection worked well in the United States until the turn of the millennium, and the country’s economy developed especially well in the early 1980s, when loan rates jumped in places to as much as 20% per annum. Unfortunately, after the dot-com crisis, the US Federal Reserve decided to lower lending rates to almost zero, and market mechanisms that had worked for centuries began to jam.
Let's imagine two businessmen, John and Bill. John works normally, receiving his few percent of profits and looking confidently into the future. Bill doesn't know how to work, he only has losses. At normal lending rates, Bill would have gone bankrupt pretty quickly and cleared the market for John. However, now Bill can take out a loan from a bank at a very low interest rate and... continue to work at a loss. In two or three years, when the money runs out, take out another loan. And then another and another, thereby delaying their bankruptcy indefinitely.
A skillful businessman, John is forced, willy-nilly, to follow Bill: to reduce prices below the level of profitability, so as not to lose customers in this unhealthy market. As an example, we can point to American shale producers, most of whom, at normal lending rates, would have gone bankrupt long ago, thereby returning oil prices to a healthy level of $100 or more per barrel.
Let's add to this unsightly picture monopolies and oligopolies, which cheap loans allowed to grow uncontrollably, and the portrait of the disease will perhaps become complete.
We observed something similar in the USSR in the 1970s and 80s. The Soviet authorities did not have enough political will to close inefficient enterprises, and they gradually degraded, producing products of lower quality and less and less in demand by the economy. The hothouse conditions led to a logical result: when, after the collapse of the USSR, domestic industry was thrown into the arena with the capitalist tigers, during the first years it was practically unable to provide them with worthy resistance.
Exactly the same thing is happening now in the West. Of course, the central banks of the United States and the European Union are well aware that POPS is a dead end, but it is no longer possible to return back to healthy capitalist lines. Raising interest rates to a level of at least 5% per annum is guaranteed to kill businesses that have become hooked on cheap loans.
Unfortunately, this problem no longer has a good solution. If the USSR had at least a theoretical opportunity to follow the example of China by gently reforming the economy (instead of handing it over to the slaughter of pro-American reformers), then our Western friends and partners simply no longer have such an opportunity. Printing presses have produced so much money over the past 15 years that it is unlikely that it will be possible to get out of the crisis without massive bankruptcies and hyperinflation.
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Negative interest rates. Reasons and expectations
Relevance of the topic. Negative interest rates are of interest to both economists and the public. However, in this case there are costs: money is subject to theft and physical destruction. Therefore, holding currency is very expensive: it needs to be protected in large quantities, it is difficult to use for large and remote transactions. Interest in negative interest rates has grown significantly recently. They operate in Switzerland, Sweden and Japan, and over the past 10 years they have been introduced by the European Central Bank, the National Bank of Denmark, the Bank of Italy and the Netherlands Bank. Given the dynamics of interest rates in many large economies of the world, there is a high probability that many other Central Banks will introduce negative interest rates.
The purpose of the work is to study negative interest rates. To achieve this goal, a number of tasks are solved:
1) study the essence of negative interest rates;
2) explore whether negative interest rates always produce a positive result for the country's economy.
The essence of the negative interest rate policy (NIPR) is the introduction of a negative interest rate on bank deposits. This is a radical anti-crisis measure that the governments of a number of countries are using or planning to use in order to artificially inject additional money into the economy. In most economies, the central bank prints money and lends it to selected banks at a certain interest rate, after which the money is distributed further within the economy. This percentage has a direct impact on inflation. If a large bank returned 10% more money to the central bank than it took a year ago, this means that the difference of 10% has been taken out of the economy, there is less money, money has become more expensive. In this way, banks target inflation by setting interest rates above the inflation rate. However, if inflation in a country is 1-3%, then there is no need to fight it. In this case, the central bank sets stable economic growth as a priority. For these purposes, interest rates are reduced, making loans cheap, thus stimulating the economy to increase production and GDP growth.
But if interest rates are in the near-zero zone (as, for example, in the EU or the USA), then, as the examples of many European countries show, negative interest rates should be introduced. Under POPS, the central bank lends money to banks at a “negative interest rate,” meaning that after a year, those banks will return less money to the central bank than they took out a year ago.
Thus, additional amounts of money are injected into the state’s economy, money rapidly becomes cheaper, inflation rises, and prices rise. With negative deposit rates, it makes no sense for depositors to keep money in the bank.
Thus, the Central Bank encourages people to spend more, supporting the national economy. Loan rates are also negative, but if you take into account all the bank's commissions, you still get a small percentage. The loan still remains paid, but there is no longer a risk fee in the usual sense; in fact, borrowers pay the bank for its work in preparing documents.
The main reason why sane investors accept negative returns on their capital is because they believe that deflationary forces are accelerating forward and that interest rates will fall further, but this cannot be predicted with complete certainty. However, the implications of negative interest rates are significant. In attempting to overcome the build-up of deflationary pressures, many governments have no choice but to rely heavily on Central Bank policies and strategies rather than other methods of changing financial market behavior. There are three macroeconomic tools that governments can resort to in an attempt to stimulate demand growth:
Fiscal policy;
Monetary Policy;
Monetary policy.
Because the world needs economic growth, bankers and treasury officials around the world are trying to manage investor preferences by focusing their attention on risky assets rather than "safe" ones. With short-term interest rates at 0% (or lower), banks are penalized for holding large deposits with central banks. Regulators impose different fees on banks on these accounts. Consequently, some banks face negative interest rates while holding funds in reserves at the Central Bank. Central banks apply negative interest rates on deposits as a monetary policy tool to prevent banks from depositing excess funds with central banks.
For example, the European Central Bank (ECB) set deposit rates at -0.2% from September 2014, as a form of punishment for banks that hold excess cash at the Central Bank. This is an extreme measure of monetary policy that involves changing interest rates, just as when central banks cut interest rates to stimulate economic activity. EU countries are currently struggling with negative inflation, i.e. deflation, and the ECB decided to cut interest rates on deposits below zero to release banks' excess cash into the economy. In February 2015, Germany sold five-year government bonds in the amount of 3.281 billion euros with an average yield of 0.08%, i.e. investors were willing to pay the German government to lend its debt. In the eurozone, there were €1.5 trillion ($1.7 trillion) in negative-yielding debt deals in a wide range of countries, including Austria, Denmark, Finland, Germany, the Netherlands and Switzerland.
The rationale for investing in bonds that involve a guaranteed loss is as follows:
· Expectation of negative returns. In line with the current deflationary economic environment in Europe, investors who purchase bonds with negative yields can expect yields to fall further, allowing them to profit from their investment;
· Possibility of positive income. In countries where deflation is expected, investors may benefit by ultimately making a profit by investing in bonds with negative yields;
· Moving funds from more negative to less negative investments. Since some banks provide negative yields higher than government bond yields, investors prefer to withdraw cash from banks and invest it in government bonds, which will be worth less;
· Asset allocation policy. Some institutional investors are required to hold bonds in their portfolio, especially investors who specialize in fixed income securities because... they may continue to invest in negative yield bonds in order to comply with this allocation policy;
· Expectations of currency appreciation. Foreign investors who expect currency appreciation relative to negative-yielding bonds denominated in domestic currency will agree to invest in order to receive the expected positive return in domestic currency;
· Security fee. Foreign investors from emerging markets, struggling with economic downturns accompanied by defaults and currency devaluations, are accepting the purchase of negative-yielding safe-haven bonds from European economic giants such as Germany, Switzerland, etc.
The problem is that near-zero rates make it difficult to accumulate the assets that should provide retirement income. This could cause people to act opposite to what the ECB expects - saving more rather than spending.
Another important factor is the amount of cash: if there is a lot of cash in the economy, negative rates from central banks and their further reduction have limited impact. In Sweden they are effective because it is already an almost cashless economy: cash in circulation there is less than 2% of GDP. In Switzerland, this figure exceeds 10% of GDP, and it is relatively cheap to store cash, since there are large 1000 franc notes.
There is no doubt that negative rates can help overcome a recession by encouraging people to spend more, but they can also create inflation, which is clearly better than deflation. But if inflation in Japan is rather desirable, then inflation of more than 4-5% in the European Union and Britain can lead to very serious consequences comparable to the Great Depression in the United States. In this case, it is not so much the inflation itself that is dangerous, but the shock from it. Also, with high inflation, there is, although a small, probability that the members of the European Union will abandon the euro, since it is the single currency that can cause a whole chain of financial crises in the EU countries.
So, the policy of negative interest rates has both advantages and disadvantages. On the one hand, it encourages people to spend more, thereby reviving aggregate demand and production. On the other hand, such a policy carries enormous risks: the population simply begins to invest in assets with great risk, regardless of the fact that the conditional state wants to increase aggregate demand.
People will save, despite the fact that such a reliable instrument as bank deposits is actually taken away from them.
The only question is where the money will go - into gold, real estate, securities or cash, and what risks such a movement of capital will generate.
Currently, six European and Japanese central banks have negative rates.
Moreover, unforeseen side effects are becoming more and more apparent. For example, the rates of both the yen and the euro have increased, although the central banks of these regions are increasingly easing monetary policy, and the US Federal Reserve is gradually tightening it.
Thus, in March 2015, when the ECB began implementing a bond purchase program worth 1.1 trillion euros, the euro exchange rate was $1.05, and now it is $1.13. And this despite the fact that in March 2016 the volume of purchases was increased to 1.5 trillion euros, and all three main ECB rates are already in negative territory (the first reduction below zero occurred in 2014).
In addition, central banks themselves are suffering from extremely low and negative interest rates, according to a survey of foreign exchange reserve managers of 77 central banks conducted by the Central Banking Publication and HSBC (as of August 2015, they had $6 trillion under management).
Of these, 80% said negative rates had an impact on their portfolio management strategy, and 60% said negative rates had an impact on their central bank. Most change their strategy, including buying riskier instruments.
After all, a number of government and even highly rated corporate bonds are now trading with negative yields. Central banks must preserve capital, so investing in securities on which they have to lose money is counterintuitive. To achieve profitability, they have to act more aggressively and, in some cases, take on more risks.
The Swiss National Bank, in order to contain the strengthening of the franc, made the deposit rate for commercial banks negative. There are no deposits left in the Swiss bank without negative rates.
Banks in Sweden, Denmark and Switzerland have struggled to offset negative rates by increasing the cost of loans - particularly mortgages - and by charging higher fees. As a result, borrowing costs went up rather than down.
The essence of the problem is this: markets are no longer sure what the introduction of low rates in a number of countries will lead to. Peter Prat, chief economist at the European Central Bank, said last week: “As other central banks have demonstrated, we have not yet reached the physical lower bound.” As long as this uncertainty remains, it is difficult for banks to understand whether new loans are economically feasible, and it is difficult for investors to properly value bank assets. Following the ECB's deposit rate cut by another 10-20 basis points, the impact on bank profits could become exponentially negative.
Denmark and Switzerland sought to soften the blow with tiered schemes that would tax only excess deposits and deter foreign investors from moving money out of the market. The ECB is trying an alternative scheme: a new targeted long-term refinancing operation through which it would pay banks to make loans. But this does not fully compensate for the resistance of negative rates. My estimate is that only 5 to 15 percent of the $1.5 trillion TLTRO increase will be taken out. This estimate is based on a survey of the eurozone's largest banks at the Morgan Stanley's Financials conference last week. There are practically no banks in northern Europe who would claim these compensations. In other words, nearly half of the TLTRO could end up as legacy financing operations—rate subsidies without new loans.
For banks, the indirect effects of negative rates may be more important than the direct effect. There is a risk that market liquidity will decline as low rates mean financial intermediaries will hoard high-yielding assets. There's also the question of how money market funds, which help many corporations manage their finances, will hold up in a negative rate environment. In Japan, all 11 companies that manage money market funds have stopped accepting new investments.
Some managers are buying or "seriously considering" buying asset-backed bonds and exiting currencies with negative rates, the survey found. One said central banks are buying bonds with longer maturities that have higher yields, even if those bonds are less liquid.
Reserve managers are also suffering collateral damage from negative rates.
They face the same problems as everyone else. But they understand very well that there are much more important things than the profitability of their reserves.
In January 2016, the Bank of Japan surprised markets by setting the interest rate on bank deposits at -0.1% from mid-February. So he wanted to stimulate economic growth, lending and inflation. But the experiment led to unexpected results. Activity in the money markets has decreased, while at the same time demand for government bonds has increased, although the yield of many of them is negative.
The yen exchange rate against the dollar did not fall, but rose to its highest level in a year and a half.
Bank of Japan Governor Haruhiko Kuroda said he was ready to ease policy further if necessary.
But financial market participants are not so confident in the effectiveness of negative rates.
The level of interest rates has little effect on the demand for loans, and the market loses its purpose.
Lower interest rates usually lead to a weaker currency, which benefits exporters.
This is a key goal of the so-called Abenomics, a package of measures adopted by Prime Minister Shinzo Abe.
But the yen has strengthened this year amid uncertainty in global markets and a weakening dollar.
In addition, foreign investors unexpectedly entered the Japanese bond market - they were attracted by the possibility of super-cheap financing in yen.
As a result, the yen rose as traders believe that the Bank of Japan is now unable to significantly ease policy. There is no guarantee that lower rates will encourage corporate investment and households to choose investing over saving.
Kuroda predicted that banks would increase lending, but they began to look for more profitable investments abroad.
According to the Ministry of Finance, in March, Japanese investors purchased foreign securities worth 5.47 trillion yen ($50 billion) - 11% more than in February.
Because of this, Japanese investors' demand for dollars increased, and they began to borrow them from foreign financial institutions. They, in turn, increased commissions (for example, for three-month contracts - almost doubled) and began investing the yen they received in Japanese government bonds, traders say.
Although their returns are negative, foreign investors still benefit due to high fees. According to the Japan Securities Dealers Association, net purchases of Japanese government bonds by foreign investors increased in February compared to January by 16% to 18.3 trillion yen ($167.4 billion). And their net purchase of medium-term bonds in February was twice the average for 12 months.
Even strong demand for dollars from some Japanese investors could not prevent the yen from rising.
There is no reason for the yen to strengthen amid negative rates. But due to concerns about China and the global economy, the yen has gained safe-haven status. And at the same time, doubts arise about the effectiveness of Abenomics.
Directly negative rates can be seen as a technical point in the policy of central banks to stimulate economic growth.
However, another explanation can be given for their appearance if we rise to a higher level of abstraction from numbers and quantitative dependencies.
If we look at the economy as a living organism that is trying to restore its vitality, then negative rates and negative bond yields can be defined as ways in which the economy is trying to solve the problem of reducing liquidity, although in form such actions of central banks, on the contrary, look like an attempt to increase liquidity in the economy.
Conclusion. The main advantages of zero interest rates include lowering the cost of capital and increasing the role of refinancing, while the disadvantages are currency depreciation and encouragement of excessive borrowing. Thus, the negative aspects of zero (negative) interest rates prevail over the positive ones, so their use has an extremely negative impact on the economy and leads to crises. Negative interest rates are a high-risk experiment.
Negative rates have helped weaken the Swedish and Danish crowns, supporting those countries' exporters, but the same has not happened in Japan: the yen continues to attract capital from abroad because investors continue to view it as a safe haven. Switzerland,
Sweden and Denmark use negative interest rates primarily to weaken the value of their national currencies, so as not to lose their competitive position on the world stage as a result of rising import prices. The European Central Bank (ECB) and the Bank of Japan use negative interest rates mainly to stimulate economic growth by fighting deflation.
