Yup, we’re back here again. Here’s how Credit Suisse ranks the ECB’s options if, or when, the increasingly dovish governing council decides that more easing is necessary:
The first option comprises exhausting the ECB’s standard policy lever by cutting rates further. We expect this to be the first response if more needs to be done and could be prompted by inflation falling to 0.5% y/y or lower. A further cut in the key policy rate would also entail taking the deposit rate into negative territory.
The Credit Suisse European economics team are growing concerned about Mario Draghi’s disinflation problem:
The ECB meets this week and expectations about what Draghi and team may or may not do seem to be erring towards the non-event side of things.
But, as Beat Siegenthaler at UBS observed in a note on Monday, there still seems to be a lot of confusion about the likelihood and usefulness of negative rates being introduced. A rise in eurozone rates over the past two weeks has only added to the confusion: Read more
Everyone has an open mind about negative rates these days… Swiss National Bank chief Thomas Jordan has said he certainly does following this piece of repeat advice from the International Monetary Fund’s annual report on Switzerland (our emphasis):
The conjuncture of Switzerland may render some of the potential drawbacks [of negative interest rate] less relevant than in other countries. Activity in the interbank market is already very low, as all banks have excess liquidity. Switzerland is experiencing strong credit growth, particularly in the mortgage market. The impact of negative interest rates on mortgage rates depends on the pass-through.
Back in July, 2012 the Danish central bank, Nationalbanken, lowered the deposit rate to -0.2 per cent. Back then we wrote that it was going to be costly for the banks, and that money market rates were going deeper into negative territory. With Draghi’s comments last week, how did that whole negative deposit rate action turn out for Denmark?
Nordea had a note out last week on that very subject. Now, before we move, let’s remember that Danish monetary policy is tailored around the FX peg. The deposit rate was there to assure outflow because of mounting pressure on the EUR/DKK pair. Read more
Gary Jenkins writing in Credit Matters this week gets to the heart of the matter when it comes to what investors should do with their money (our emphasis):
Is nowhere safe? The natural reaction to this is that fi nancing for banks should become more expensive. We are already seeing this reaction in the market to some degree. But what does this mean for a product like Cocos? How does an investor monitor the risk of conversion if the ECB could, on any given day, decide to withdraw liquidity unless the bank were to improve its capital position?
Okay. Negative interest rates have now gone fully mainstream in the UK thanks to this week’s testimony by Bank of England deputy governor Paul Tucker.
Even the Daily Mail is writing about it.
But a number of major misunderstandings are popping up as a result. So let us try to clear some of them up. Read more
Throwing around the negative interest rates idea has become very trendy all of a sudden with Draghi, Praet and Constancio weighing in and, we’d argue, using the threat to substitute for policy impotence.
So, was Bank of England deputy governor Paul Tucker doing the same thing on Tuesday morning in front of a Parliamentary committee? Using a jedi-trick to talk down sterling perchance? It’s not a phrase you use lightly and it seems unlikely he would have whacked it out completely unintended. But it has to be said, if he was going Jedi here, the effect didn’t last all that long. Read more
The big story on Friday concerns the terms and structure of Qatar’s life-saving support for Barclays at the peak of the financial crisis in 2008. As Daniel Schäfer, Caroline Binham and Simeon Kerr report, the key issue is whether Barclays lent Qatar the money to buy shares in the bank. Read more
From the Danish central bank:
Effective from 25 January 2013, Danmarks Nationalbank’s interest rate on certificates of deposit and the lending rate are increased by 0.10 percentage point. The discount rate and the current account rate are unchanged. Read more
Remember the whipsawing days of 2008? The days when commodity prices couldn’t get crazier?
Dear central bank of Santa,
We, the banks, think we have been really good this year. We didn’t pick on retail customers. We didn’t tell on our Libor manipulating friends. We respected our regulator parents. And most importantly we didn’t have a hissy fit that nearly brought down the global monetary system. Read more
Some Praet-prattle in the WSJ last week has put a bit of a dampener on the idea that the ECB is gonna go for a negative deposit rate in the near term. Read more
Are you a Swiss bank? Do you have haven appeal? Want to make some quick, easy money? Then keep reading…
Credit Suisse has decided it will start charging negative rates on Swiss franc cash balances above a certain threshold. From CS: Read more
The abstract from the latest paper by Peter T. Leeson entitled “Human Sacrifice” (H/T Tyler Cowen at Marginal Revolution): Read more
Remember when Denmark’s central bank went negative, back in July?
After the ECB’s deposit rate went to zero, the Nationalbanken cut its own deposit rate, largely in order to stem capital inflows. Read more
To all those still defending negative interest rates — arguing that the stimulative effects will outweigh the costs to banks — we bring you the following from Tina Mortensen at Citi on Wednesday:
Denmark — FSA urges banks to charge customers more and to cut costs deeper to stay competitive. Following the introduction of negative interest rates, Danish banks are struggling to maintain their interest rate margins. At the same time, the economy has still not recovered from last year’s funding crisis and the fallout of a burst housing bubble in 2007. Read more
Here’s an interesting factoid by way of Bartosz Pawlowski from BNP Paribas’ CEEMEA team — Eurozone yields aren’t the only ones being haunted by negativity.
As it turns out, euro-denominated non-eurozone debt is also treading perilously close to the zero mark. Read more
Okay. It’s true. We’ve become slightly obsessed with negative yields at FT Alphaville. Especially with regards to what they signify for the financial industry.
Though, for a long time we’ve felt very much alone with this obsession. Weirdly enough, nobody else has seemed too bothered about it. (Note, we even had to go to the ECB directly to ask Draghi what he thought about it.) Read more
A while ago we observed that negative gold leasing rates were potentially signalling something awry with the Libor rate.
That judging by gold forwards, the Libor component of the gold lease rate calculation (Libor-GOFO = Lending rate) was coming in much lower than what might otherwise be expected. Read more
Maybe not truly natural, as this is a matter of currency intervention, but close.
After the ECB lowered its interest and deposit rates on Thursday, the Danish central bank, Nationalbanken, followed a few hours later. Read more
This is a follow-up to our post on “base money confusion“, which incorporates some of the ideas we’ve raised in our “beyond scarcity” series.
Let’s assume a few truths (we’re sure they’ll be up for debate, but here goes anyway): Read more
Germany appears to have had a successful auction of six-month debt on Monday.
That said, there is a caveat. The auction for €3.9bn worth of paper achieved a bid-to-cover ratio of 1.8 versus a previous bid-to-cover of 3.8. The average yield was a negative 0.0122 per cent — a bit of an auction first. Read more
Bank of New York Mellon said it would start charging a fee on large deposits in response to a “sudden” and “significant” increase in its balance sheet from investors searching for a haven to stash their cash. Accounts with an average deposit of more than $50m will be charged a 13 basis point annual fee on the excess and an additional fee if short-term Treasury bills produce negative yields. On Thursday, yields on one-month Treasury bills dipped as low as -0.0102, their lowest level since January last year, in turbulent financial markets across the world. Banks have seen an influx of cash deposits in recent weeks as the US Congress and White House struggled to reach agreement on an increase to the country’s debt ceiling. Regulators assured them that they would look sympathetically on any temporary breach of capital ratios. But BNY Mellon said in a letter to clients that the “extraordinary deposits” meant that fees were necessary to safeguard the “quality and strength” of its balance sheet. For more see FT Alphaville.
In the frantic flight to safety on Thursday, Treasury yields touched an all-time low of 26 basis points, the NY Times reports. Rates on even shorter-term credit, including six-month Treasury bills and overnight loans in the vast market for repurchase agreements, swung toward zero Thursday. Meanwhile Bank of New York Mellon said it would start charging a fee on large deposits in response to a “sudden” and “significant” increase in its balance sheet, the FT reports. Accounts with an average deposit of more than $50m will be charged a 13 basis point annual fee on the excess and an additional fee if short-term Treasury bills produce negative yields. Yields on one-month bills did fall into negative territory on Thursday, dipping as low as -.0102 per cent before closing at zero.
The ‘psychological shock’ of Wednesday’s moves by the Swiss National Bank to stem the rapid rise of the franc is already wearing off — at least in the FX market. Read more
On Wednesday, the SNB unleashed it’s ultimate Swiss franc depreciation plan — le plan, negatifs taux d’intérêt – a.k.a the strongest signal yet that it is prepared to take interest rates negative to curb Swiss franc strength.
Yes, there were liquidity measures announced too, but make no mistake, that’s not what was really messing with forex traders’ heads on the day. Read more
As documented by FT Alphaville, Willem Buiter has a thing for negative interest rates.
Most recently he’s been touting the idea again, this time in an opinion piece for the Wall Street Journal. Read more
From an economic letter by Glenn Rudebusch, senior vice president and associate director of research at the Federal Reserve bank of San Francisco dated May 22 (H/T Greg Mankiw’s blog), emphasis FT Alphaville’s:
This dashed line shows that, in order to deliver a degree of future monetary stimulus that is consistent with its past behavior, the FOMC would have to reduce the funds rate to -5% by the end of this year—well below its lower bound of zero. Alternative specifications of empirical Taylor rules, described in Rudebusch (2006), also generally recommend a negative funds rate. Read more