Most of the world’s central banks have injected massive amount of liquidity, or money, over the course of last couple of years. Through rate cutting and quantitative easing, CB’s have been trying to crack credit dead lock by making money available to major commercial banks in their respective jurisdictions. So far all these efforts had little effect on loan availability. Banks have tightened their lending standards and money is slow to flow to business.
Situation causes great concern to financial authorities. Unprecedented stimulus packages, combined with interest rates at or near 0%, leave very little room for farther monetary easing. At the same time, they must come up with some kind of viable exit strategy. Governments have assured taxpayers that bailout money would largely be recovered, while central banks must demonstrate ability to clear their books, even though it would be through “creative accounting”.
Large banking institutions are accused of hoarding cheap money and not passing it along into economy. This is exactly what happened in Japan few years ago when Bank of Japan instituted its easing policy. Banks in that country simply refused to lend money in fears of ever worsening economic conditions. They didn’t want to left holding the proverbial bag. Now it became a world wide problem.
Swedish national bank, the Riksbank, have introduced a novel idea of “negative interest rates”. This is believed to be the first time a major central bank took such a drastic action. Current rate in Sweden is minus 0.25%. Officials hope that by charging commercial banks rate on deposits, it will force them to start lending money to business and individuals, thus jump starting the economy.
Banks are required to keep certain percentage of their money on deposit with central bank. Now, instead of earning interest on these deposits, banks will have to pay Riksbank 0.25% for this. This means that the more loans they make, the less money they must keep with central bank and, ultimately, pay less in interest. Riksbank thinks that making additional loans will be in the financial and business interest of commercial banking institutions.
So far Swedish authorities are the only ones to employ this controversial tactic. However, some other central banks also view it as an additional step they could take. Among them is Bank of England. The governor, Mervyn King, hinted that he could follow Riksbank’s lead. Others are waiting to see if this action is producing results desired, without serious side effects.
Critics of this move claim that outside of creating controversy, launching negative interest rates will do nothing to truly improve lending conditions. Any additional costs accrued by banks will simply be passed on to borrowers in the form of raised rates and extra fees. As a matter of fact, it could force banks to invest more money into debt instruments, leaving less available for direct lending.
Currency traders should watch closely Swedish Krona over next few weeks. Nobody knows what to expect, since the negative rate situation is unique. Behavior of SEK could easily give clues to what can expected from other currencies, should more central banks step into that territory. And this could happen fast, if we see an up tick in lending by Swedish banks.
Mike K.
[...] Read the rest of this great post here [...]
Interesting.
I still read your blog daily, but I’m not commenting much. I really like it. Posts are majority of time educational and that is great.
regards
FX
[...] [...]
Have a great holiday! Are you going on a trip, or will you post something tomorrow?
This was a very good play, pound-frank. I think this is a start of something bigger. Hope you are having fun this weekend.
This happened two months ago. And I’m pretty sure the krona has rallied since then.
Michelle, I’m not really going out of town, so there will be a post tomorrow.
Hi, Malavel,
Yes original decision came 2 months ago, but the rally in SEK was probably unrelated, and part of broader move including more currencies. It came later. Now, that some time has passed, it becomes more interesting to see if there is an increase in bank lending in Sweden AND if this is attributed to this action. When the connection is established, that’s when other central banks, like BoE, would be more serious about doing the same.
[...] didn?t want to left holding the proverbial bag. Now it became a world wide problem…. More on Negative interest rates. http://www.moneytec.com/forums/ [...]
I’m not sure I follow. The rate here in Sweden is, afaik, still at plus 0.25%? Could you explain what you mean or give me some pointers?
Ah. Nevermind. Found it, thanks.
Hi R,
here is another link to Riksbank. Maybe even the one you found
http://www.riksbank.com/templates/Page.aspx?id=32559
[...] of Sweden, lowered its deposit rates for commercial institutions. In fact, they established negative rates, which is believed to be for the first time in history. Jury is still out on the immediate effect [...]
[...] efforts by governments and central banks to unlock jammed credit markets. Swedish Riksbank, which introduced negative rates on commercial banks deposits few months ago, left its benchmark rate unchanged. Officials said they [...]
[...] 0.55% yield, the first time ever that this kind of financial alchemy was performed. A year ago, the Riksbank was charging commercial banks rate on deposits, instead of paying it, hoping to force banks into more lending. However, negative rates on bonds? [...]
[...] 0.55% yield, the first time ever that this kind of financial alchemy was performed. A year ago, the Riksbank was charging commercial banks rate on deposits, instead of paying it, hoping to force banks into more lending. However, negative rates on bonds? [...]
[...] the first time ever that this kind of financial alchemy was performed. A year ago, the Riksbank was charging commercial banks rate on deposits, instead of paying it, hoping to force banks into more lending. However, [...]
The New ‘Das Kapital’.
Too many people believe that FREE MARKET ECONOMY and CAPITALISM is one and the same thing, as opposed by COMMUNISM.
Communism is nothing more than a philosophy originating from a study of the poor living conditions of workers during the industrial revolution.
Capitalism is nothing more than a monetary system originating from the use of gold and later deposit slips for gold as a means of exchange.
But Free Market Economy is a natural way of bringing offer and demand in balance that already existed in the time of barter trade.
Capitalism exploits labour to create added value …. or so Karl Marx said.
But let’s face it ….. The only real existing value in this world is LABOUR! Nothing can be achieved without it. No raw materials can be extracted from the earth without labour …… No food can be produced …… No added value can be created….. No profits can be achieved …… Nothing! On the other hand …… CAPITAL has no real value at all. You can’t eat it. In Mugabe’s Zimbabwe, they burn CAPITAL (paper money) because it is cheaper than firewood!
Contrary to popular believe: Money is TIME! When you earn money, you have given your time in producing something … in rendering a service of some kind … in trading something ….. or whatever ….. and received money for that! This money allows you to buy TIME from somebody else. You can buy a product that someone created with his time … a service ….. you name it. It is always TIME that you buy! Part of the time that you can buy for your money has already been transferred into products. A car waiting to be sold ….. Food in the supermarket …… Tools of some kind …… A house…. But services still to be rendered ….. products not yet created …… are still in their basic form of available TIME! So when unemployment is skyrocketing we should be so happy! There is so much TIME available! What richness! What wealth for a nation! But are we happy with high unemployment?
TIME when it is not consumed loses it’s value. At a rate of 100 % per day. We are used to transfer the time that we are owed into CAPITAL in order to be able to transfer it back into TIME when we want to buy something or invest it. CAPITAL keeps, but TIME doesn’t!
In order to persuade someone to invest his capital he wants interest or profit of 4 % or more or he hangs on to his capital. In order to persuade someone to invest his time in a period of unemployment you can give that person less than what he needs to survive and he will still sell you his time. Something is better than nothing!
And that is how capitalism is able to exploit labour to create added value. By transferring time owed into CAPITAL and only buying time back when it can make a profit, allowing TIME or LABOUR to be completely lost when it is thought that no added value can be created with it. High unemployment, poverty and crises are the flaws of CAPITALISM. Not of the FREE MARKET! Without transferring the time that we are owed into CAPITAL and having to consume that time without too much delay we would still have a FREE MARKET ECONOMY, but we would not have CAPITALISM!
So how can we have a Free Market Economy without the flaws of Capitalism?
Barter trade? Of course not! We live in the 3rd millennium! Even though we still use a money system from the 1st or 2nd millennium! If CAPITAL or MONEY is to be a means of exchange for TIME, then it should have the same property as TIME! Meaning … it should lose value when it is not consumed within a certain period, just as TIME does! But how to achieve that?
Nothing is easier. Let’s look at one possibility: Substitute V(alue) A(dded) T(ax), which is a punishment for transferring labour into added value, by V(alue) D(iminished) T(ax) on money in possession as long as it is not used. A negative interest Tax on money. For that we would have to change cash money into digital money in our bank account. But hey! We pay with pin, credit card, chip, cheque, internet, mobile phone ….. We are in the 3rd millennium! Substituting VAT by VDT will certainly make us all a lot richer. As TIME or LABOUR is the only real value that exists we cannot accept a monetary system like CAPITALISM that allows it to go to waste.