10 thoughts on “Negative interest rates: policy reaches a new low”

  1. Posted 28/02/2013 at 12:50 | Permalink

    Without savers, and the small amount of interest paid to them, for bankers use of savers deposits, then banks are not banks anymore, and should relinqish the name of bank, and the very meaning of it!

  2. Posted 28/02/2013 at 13:27 | Permalink

    To some extent we are already suffering from negative interest rates in the UK, especially when inflation is priced in. Instead of parking your money in a bank and watch it disappear it is better to invest it in things that will save money in future: Home insulation, fitting PV solar panels, buying a car that does 85 miles to the gallon buying woodland to fuel your stove, are just a few of the things that will generate growth and proved a rate of return greater than offered by the Banksters and their chums in government who actually TAX interest! I am rapidly running out of cunning stunts though!

    Any move by the B o E to “go Japanese” would however be disastrous (with our poor record of savings)

  3. Posted 28/02/2013 at 15:22 | Permalink

    A couple of points.

    Firstly the Telegraph article you link to is from 2010.

    Secondly, what is so controversial about low interest rates discouraging saving? This is exactly how monetary policy works – a reduction in interest rates makes borrowing/spending more attractive and saving less attractive.

    I also fail to see what is Keynesian in the slightest about it.

    Would be grateful for some clarification.

  4. Posted 28/02/2013 at 16:20 | Permalink

    A worrying aspect of these type of policies is their long-term effect on people’s attitudes towards saving, i.e. the way they undermine a ‘savings culture’. Time preferences are likely to rise as result, breeding various negative effects including greater dependence on state safety nets.

  5. Posted 28/02/2013 at 16:23 | Permalink

    Discouraging savers is a new one on me, governments always cryed out for savers throughout the decades, no wonder the world is in deep, deep financial crisis, look how the bank prodigies have brought the world to it’s knees, and it still is calling for people to spend, spend spend, money they dont have.
    Another wave of new world debt is waiting in the wings!
    Theres one sure way for growth, and that is to build, manufacture, and to produce real jobs, and not Q.E. and casino banking, as politicians and bankers rely on!

  6. Posted 28/02/2013 at 16:33 | Permalink

    I disagree with this. It is perfectly possible that the natural interest rate is negative at the moment, either because of government supply-side restrictions, or because we are going through a period of relative technological stagnation.It might simply be that it will cost more to consume in the future than to consume now – there is no a priori reason to expect a positive interest rate.

    In either case, propping up a positive interest rate artificially (as the BoE does at the moment) merely disguises and distorts that feature of the economy, with the side-effect of benefiting banks that have nowhere else to put their money but at the BoE.

  7. Posted 28/02/2013 at 17:31 | Permalink

    @Ben – you are correct that it is how monetary policy works and monetary policy (if it is to be operated by central banks) should try to bring savings, credit and investment into broad equilibrium (ignoring the overseas sector). However, the words used perpetuate the myth that the economy is just a set of aggregates and that more saving is bad and consumption good. What is important is that the price mechanism works effectively so that savings are turned into productive investment. Through the price mechanism via changes in market interest rates a reduction in consumption can (and should) be turned into a rise in investment – of itself it is not bad for the economy.

  8. Posted 28/02/2013 at 18:27 | Permalink

    Ben – Low or negative interest rates are Keynesian insofar as they are based on the idea that the economy’s lack of growth is due to too little consumption. The Keynesians claim that low “aggregate demand” is the problem. In fact, the problem our economy has is a lack of saving, which – if it were higher – would provide investment and rearrange the economy, creating growth and higher prosperity.

    The problem with “monetary policy” is that it should not exist. We do not have a “clothing policy” or an “operating systems policy”. And, thank goodness, we do not have an incomes policy, setting wage and price controls. Interest rates should be set by markets and the Bank of England should be returned to the private sector, which is where it was before its post-war nationalisation.

  9. Posted 28/02/2013 at 21:35 | Permalink

    Alex: I agree that Britain almost certainly has supply side issues but the immediate problem is demand. The quantity of money/nominal spending has declined when it should’ve been growing steadily and as I’m sure we all remember courtesy of Friedman & Schwarz, that’s a bad thing. Negative interest rates would help us get back to much desired demand growth.

    The Bank of England’s privatisation wouldn’t end monetary policy, in fact, its nationalisation was merely a formality, nothing much changed in practice until the FSA came along. The reason we have monetary policy is because there are benefits that accrue from stable money growth which the market may not provide on its own. So why take chances?

    Steven: Banks’ demand for cash balances has risen, causing a monetary contraction. Negative interest rates will reverse this trend. Savings would most likely benefit because of the gains to employment and the economic growth that would result from such policies.

  10. Posted 02/03/2013 at 12:10 | Permalink

    Negative rates on bank reserves acts as a fixed tax on the banking system. The only way for the banking system as a whole to reduce its impact is to expand by lending more, increasing the ratio of (untaxed) ‘bank money’ to (taxed) ‘base money’. Unlike conventional profit or transaction-based taxes, negative rates fall most heavily on the least active banks, those with the highest reserve ratios. Conventional taxes, since they discourage activity (lending), are passed from banks onto wider society in the shape of higher margins on loans and lower rates on deposits. Negative rates, on the other hand, cannot be passed on, since they force lending up – all of these additional loans will need funding, and so deposit-taking cannot be deterred by banks trashing rates to savers. Radical policy would replace conventional taxes on banks with a negative rate on reserves deposited at the central bank.

    http://wealthoflabour.wordpress.com

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