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Loans at negative interest rates due to COVID 19?

Adelina Toader (Translated by Cosmin Ghidoveanu)
English Section /

Loans at negative interest rates due to COVID 19?

Bank of England bringing back discussions about negative interest on loans

A world where banks will be paying us to borrow money from them doesn't seem so far from reality. After the Bank of Japan and some European Central Banks have lowered interest rates into negative territory, there is increasing speculation and hints that the Bank of England (BoE) could also resort to cutting borrowing costs below zero or to cushion the economy that has been struck by the coronavirus pandemic, according to several international press sources.

The BOE has cut the interest rates twice as the COVID-19 crisis has escalated in March, to a record level of 0.1%, according to Reuters.

Most economists claim that the bank's next move will be to add this measure to its GBP 645 billion bond purchase program (USD 783 billion) immediately after June 18th, at the end of its scheduled reunion.

Also, many experts think that this measure will essentially lead to a situation where people will be paid to borrow money, with this being a way of encouraging people to spend money in an economy that desperately needs that. It is also being hoped that investors will be more willing to invest in companies in order to make the money move, instead of letting cash lose its value while being kept "under the mattress".

Earlier in the week, investors began to see the possibility of the Bank overcoming its long-standing reluctance to consider sub-zero interest rates by the end of 2020, given that the country could be hit by the biggest economic crisis in the last three centuries.

This change in the markets came after BoE chief economist Andy Haldane said the central bank was looking more closely at negative interest rates as well as buying riskier assets.

He said in an interview with the Daily Telegraph: "The economy is weaker than a year ago and we are now at the lower effective limit, so there are things that we will have to look at with some greater urgency" .

On Monday, Silvana Tenreyro, in charge of setting interest rates, spoke about the advantages of negative interest rates, citing the experience of other European countries.

"My personal view, which stems from an analysis of European experiences, is that negative interest rates have had a positive effect in the sense that they have had a fairly strong transmission to real activity," she told a London School of Economics webinar.

Tenreyro and Haldane's statements, the latter being one of the main decision-makers within the BoE, conveyed a bigger sense of urgency than Governor Andrew Bailey's message.

Last week, Bailey said that considering sub-zero interest rates "is not something we are planning or have in mind," but added that it was not wise to rule out anything.

JP Morgan economist Allan Monks said the comments, along with Deputy Governor Ben Broadbent's May 12 statement that the BoE should continue to weigh the pros and cons of negative interest rates, suggested that the central bank was revising its position.

"Despite mixed messages from the BoE, it appears that the MPC (Monetary Policy Committee) considers this (ed. note: negative interest rate) to be a debate worth revisiting," Monks said in an email to clients.

The departure of former Bank of England Governor Mark Carney, who had an opposition to the negative interest rate, in March, may have created room for new talks, he said.

While the ECB and the Bank of Japan have cut some interest rates below zero in an attempt to persuade banks to turn their cash into loans and boost economic growth, the BoE has said that in its view such action would be counterproductive, as it would affect banks and reduce their ability to lend. But investors have not failed to note the apparent desire to revisit these questions.

Rob Wood, an economist at BofA Global Research, said that the recent comments allow for misunderstandings, but the BoE seemed to signal that 0.1% was no longer the limit, and a cut to zero was possible in August.

"We think that a 0% interest rates are easier to take under consideration by the BOE and it will have to exhaust other options, which will take time until negative interest rates are accepted", Wood said.

Below zero interest rates would further weaken the GBP, which is already at a two-month low against the US dollar and the Euro, due to the prospect of failure in post-Brexit trade talks between London and Brussels.

Wood also said that the statement that negative interest rates will never be applied doesn't seem to make sense in the current context: "We think that the likelihood of negative interest rates is greater for 2021 than 2020. We can no longer rule them out."


"We are in a crisis and the economy needs to be supplied with money"

Some central banks are discussing the possibility of lending at negative interest rates in order to support the economy, which is in crisis, said Adrian Vasilescu, strategy consultant at the National Bank of Romania (BNR). He, however, expressed hope that this will not be put into practice. "Things are trending towards this happening. It is an idea that the French governor has also discussed. The banks are looking back at the crisis of 1929-1933, in the aftermath all of those who analyzed it said that the big mistake at the time was that they let the markets solve the crisis, and the economy was not supplied with money, now it is a new crisis and the economy must be fed money, but only those with power can do it. There are lots of statements on the matter - from Donald Trump who says the treasury will send cheques to families' mailboxes, to some central banks announcing that they could lend to businesses and the public under certain conditions". (E.O.)



"Negative interest is just the expression of the intellectual and moral bankruptcy of central banks"

The announcement of a negative monetary policy interest rate will not stimulate economic activity in the UK, as shown by the experience of central banks in Japan and the Eurozone, according to former banker Călin Rechea, economic analyst at BURSA.

In his opinion, the effect will be the opposite of what is expected, especially where the banking system is unable to grant loans at negative interest, because that results in a permanent consumption of capital.

"According to the theory of creating money out of nothing by lending, supported in a 2014 Bank of England study and empirically demonstrated by German professor Richard Werner, repaying less than the amount granted not only means reducing the volume of money in the economy, but also the permanent supplementation of bank capital, even in the ideal circumstances where non-performing loans do not exist.

If the theory of financial intermediation is considered correct, then banks will have to apply higher negative interest rates, in absolute terms, for customer deposits than for loans granted.

And if that happens, even if depositors do not liquidate their deposits, there is a permanent need for additional capital, which makes it impossible for banks to survive in the long run. "

In other words, Călin Rechea says, the economic aberration called "negative interest" is not a solution, but only the expression of the intellectual and moral bankruptcy of the central banks.



"Lending at negative interest rates shows that the world is worthless"

The opinion of economic analyst Aurelian Dochia is that, in the short term, there will be a phenomenon of lending at negative interest rates: "It may be that, if you have an interest rate of -3%, a loan with a -1% interest could be a profitable investment, but in the long run it is clearly an anomaly and is due to the fact that, over time, central banks have pursued a policy of supporting the economy by flooding the financial markets with money. Lowering interest rates and quantitative easing basically mean putting money on the market and money, if it gets abundant, has a negative interest rate. Negative interest loans may seem like a good thing to those who want to borrow, at first, but it is also a signal that the world no longer needs money, that it is no longer necessary to save, because any savings are actually losses, and, in a way, the world is worthless, in a such a situation".

Aurelian Dochia also told us: "It started with negative interest rates on deposits and there are many banks where you basically pay a fee to keep your money in the bank, and in many countries there is this paradoxical situation that interest rates are negative across the whole spectrum, including for end consumers".

The specialist claims that we should not expect a situation where we will be paid to borrow: "I do not know if we should expect such a thing and it is not something to be happy about, but an anomaly, which will not end well. Based on what is happening in Romania, that threat is not exactly there, because inflation is quite high compared to other countries, with inflation above 4% there is no need for the central bank to adopt negative interest rates. This is an IV drip that some banks are performing for their respective economies, but when such IVs are applied, they are good for the patient, but then said patients die immediately afterwards." (E.O.)

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