Negative interest rates? : Tue Feb 26, 2013 8:29 pm  

I believe I said on here a few years ago that this could happen: http://www.dailymail.co.uk/news/article ... rates.html This would take things to a new level of depravity whereby those who borrowed and caused the debt crisis get bailed out and come out with nice houses, buy to let portfolios, etc at the expense of others. If it weren't for the fact that the banking system would collapse we should be whacking up interest rates to cleanse the system. But, things are too bad for that.

I believe I said on here a few years ago that this could happen: http://www.dailymail.co.uk/news/article ... rates.html This would take things to a new level of depravity whereby those who borrowed and caused the debt crisis get bailed out and come out with nice houses, buy to let portfolios, etc at the expense of others. If it weren't for the fact that the banking system would collapse we should be whacking up interest rates to cleanse the system. But, things are too bad for that.

Re: Negative interest rates? : Wed Feb 27, 2013 9:49 am  

Would it not encourage people to spend/invest their money rather than see their returns diminished? People having money in the bank currently benefits no one. There is no interest to be gained from leaving it there and the banks aren't using it to sufficient levels to provide credit to lenders.

The whole economy is based on debt, it's just the way the system works. You'd have to be in a very cushy position to be able to start a business without lending money, or expand one.

Negative interest rates would draw money back from the banks to the central bank and would encourage the banks to hold less cash. If that leads to them dishing it out to lenders, all the better.

Re: Negative interest rates? : Wed Feb 27, 2013 10:42 am  

Never going to happen.

[DaveO]

Re: Negative interest rates? : Wed Feb 27, 2013 11:13 am  

Saddened! wrote:

Would it not encourage people to spend/invest their money rather than see their returns diminished? People having money in the bank currently benefits no one. There is no interest to be gained from leaving it there and the banks aren't using it to sufficient levels to provide credit to lenders.

The whole economy is based on debt, it's just the way the system works. You'd have to be in a very cushy position to be able to start a business without lending money, or expand one.

Negative interest rates would draw money back from the banks to the central bank and would encourage the banks to hold less cash. If that leads to them dishing it out to lenders, all the better.

A flaw in this argument is that there is no evidence anyone wants to borrow. The banks have plenty of money to lend and interest rates are already very low. Just look at the deals on mortgages at the moment.

One of the biggest mistake Osborne made and continues to make is to suggest that but for Grace of God we'd be like Greece etc. There is no confidence anywhere and no one wants to take on large long term debts. People are paying debt down which is what happens when you end up in this situation not looking to borrow more.

The other problem is negative interest rates wouldn't have any effect on companies investment decisions. Most large companies are currently cash-rich. They are also in no mood to invest even in expanding their own businesses so there is a load of cash tied up in businesses as well.

It's a catch 22 in that until things pick up people and businesses are in no mood to borrow but making it easier (i.e. even cheaper) to borrow won't change the mood. So on that basis I think negative interest rates would be a mistake.

Politically it would be a huge negative as well because given there is little demand to borrow it would please few and upset all the savers.

Re: Negative interest rates? : Wed Feb 27, 2013 11:39 am  

I'm not sure what good Negative interest rates will do. There's no incentive to save anything, and only the tracker or variable rate mortgages will benefit. It won't get any cheaper for new borrowers - we all know that what banks don't make in interest, they will make in additional or increased fees. It's a red herring.

I still wouldn't like interest rates to increase, though. Savers might benefit from a few quid here and there, but it will put the squeeze on borrowers - and what's the point in taking possession of properties when the increased interest rates hamper your chances of selling them on?

[DaveO]

Re: Negative interest rates? : Wed Feb 27, 2013 1:26 pm  

ROBINSON wrote:

I still wouldn't like interest rates to increase, though. Savers might benefit from a few quid here and there, but it will put the squeeze on borrowers - and what's the point in taking possession of properties when the increased interest rates hamper your chances of selling them on?

I am not even sure savers would benefit from an increase in interest rate. The link between customer deposits and bank lending has been broken. The government gave the banks billions to lend in an attempt to get the economy moving so they do not need our money to fund their lending. That is why despite the base rate being 0.5% since 2009 it is only recently saving rates really tanked to next to nothing.

Less than a year ago I was able to squirrel away some cash at over 4% fixed for five years. You can't get that rate anywhere now. The banks simply do not need to try and win our savings business because they have loads of cash at very low interest rates from the government so as long as they have it putting interest rates up will probably put the cost of borrowing up but would have virtually no effect on savings rates in my opinion.

Re: Negative interest rates? : Wed Feb 27, 2013 2:04 pm  

Him wrote:

Never going to happen.

The proposal is not to have negative interest rates for savers (although that could in principle be a boi-product) but for the BoE to charge banks to deposit funds with it. The banks in theory then have an incentive to go back to being banks and lend to businesses and would be mortgagees.

The trouble is the whole thing is a mess because banks have also been under pressure to increase capital buffers and that has contributed to reduced lending. The fact that so much of boom time lending was bad lending means they would be mad to lend willy nilly. Allied to all that the fact that the loss of AAA rating could reduce the value of gilts held by banks and we could have a disaster on our hands - namely widespread bank failures, massive devaluation of sterling and, if effect, a collapsed financial system and mass loss of wealth.

Re: Negative interest rates? : Wed Feb 27, 2013 2:25 pm  

It's still never going to happen. The effect on confidence would be too great. They'll simply increase/continue QE. Of course a little bit of fiscal loosening wouldn't go amiss, but then Osborne would have to admit he'd f'd it all up.

[DaveO]

Re: Negative interest rates? : Wed Feb 27, 2013 2:40 pm  

Him wrote:

It's still never going to happen. The effect on confidence would be too great. They'll simply increase/continue QE.

Which in reality amounts to the same thing as negative interest rates given the rate of inflation. Not for the banks of course in terms of being charged by the B of E but for the rest of us.

Of course a little bit of fiscal loosening wouldn't go amiss, but then Osborne would have to admit he'd f'd it all up.

He needs to stop making out the economy is totally up the creak as well just to cover his mistakes if he wants confidence to return. It used to be "If we don't do this we will be just like Greece" and now he's lost the AAA rating it is "Look the economy is just as bad as I said!".

Re: Negative interest rates? : Thu Feb 28, 2013 8:44 pm  

DaveO wrote:

A flaw in this argument is that there is no evidence anyone wants to borrow. The banks have plenty of money to lend and interest rates are already very low. Just look at the deals on mortgages at the moment.

There is, google "SME Finance Monitor" for figures on stuff like this.

The latest figures are for Q3 2012, in the year leading up to this, 10% of SMEs looked to borrow.

Of those that want to borrow, most do get finance to be fair, but 24% of overdraft applicants and 35% of loan applicants end up unable to get finance.

A lot of SMEs aren't that bothered about growing so they don't look to borrow anyway as they are just trying to tick along, but the engine of growth for the economy is the SMEs that are looking to expand as these are the ones that create employment and also innovate new products etc, these are the ones more likely to be looking for finance so whilst tighter credit conditions only affect a small number of firms they affect the important ones.

Also although banks have plenty of money to lend they are facing higher capital adequacy requirements due to regulatory changes so they have to have stronger balance sheets, which is good in terms of the safety of the banking sector, bad in terms of lending to SMEs as SMEs are generally a riskier asset class.

However I do get cautious when people say they whole problem is banks not lending to SMEs and once we solve lending we will sort out problems....banks have to lend responsibly and if they don't see credible signs of demand they won't lend. Unless there is either an increase in demand from exports (unlikely) or from government spending, there's not going to be much to give lenders confidence that prospective borrowers are going to be a good bet.