The European Central Bank recently announced a Negative Interest Rate Policy where they will charge banks a 0.10% rate to keep deposits. This is aimed at preventing deflation by incentivizing banks to issue more loans. While an unusual approach, negative interest rates and the Fed's zero rates both aim to boost economic growth through increased lending. However, very low rates have downsides like hurting savers, and the commentary argues against investing in government bonds due to inflated prices from central bank actions. Europe is not expected to fall into deflation as the ECB has tools to support recovery, though rates will likely stay very low.
3 simple points to understand negative interest ratesFinMarket Guru
As you must have recently come across the news that BOJ (Bank of Japan) is moving towards negative interest rates.
So what is this all about? If you are from India, you might not have faced negative interest rates in your life. Infact, you must only be aware of the term – interest rate (which is by default positive)
So, let us understand this in 3 simple points...
This presentation will discuss central bank policies as it relates to negative interest rates. The following areas will be included
1. Household Debt
2. Government Debt
3. Business Strategy for low interest rates
4. Currency Impact
5. Inflation
A war on thrift? A perversion of the natural order? A mad experiment? As more central banks push their deposit rate structures into negative territory, a vigorous debate has erupted among economists, investors and policy officials about the appropriateness, effectiveness and consequences of negative interest rates.
• Spread sectors continued to rally as investors focused more on opportunities than on risks.
• The Fed maintained its stance, but new questions emerged about how much further influence the central bank can exert.
• With tax rates fixed for the near term, policymakers turned their attention to spending cuts.
• Despite tighter valuations in corporate credit, we foresee continued solid demand and fundamentals.
3 simple points to understand negative interest ratesFinMarket Guru
As you must have recently come across the news that BOJ (Bank of Japan) is moving towards negative interest rates.
So what is this all about? If you are from India, you might not have faced negative interest rates in your life. Infact, you must only be aware of the term – interest rate (which is by default positive)
So, let us understand this in 3 simple points...
This presentation will discuss central bank policies as it relates to negative interest rates. The following areas will be included
1. Household Debt
2. Government Debt
3. Business Strategy for low interest rates
4. Currency Impact
5. Inflation
A war on thrift? A perversion of the natural order? A mad experiment? As more central banks push their deposit rate structures into negative territory, a vigorous debate has erupted among economists, investors and policy officials about the appropriateness, effectiveness and consequences of negative interest rates.
• Spread sectors continued to rally as investors focused more on opportunities than on risks.
• The Fed maintained its stance, but new questions emerged about how much further influence the central bank can exert.
• With tax rates fixed for the near term, policymakers turned their attention to spending cuts.
• Despite tighter valuations in corporate credit, we foresee continued solid demand and fundamentals.
Agcapita July 2013 - Central Banking's Scylla and CharybdisVeripath Partners
While I believe that eliminating QE is the right thing to do for the long-term health of the economy, the recent equity and bond market declines are but modest harbingers of the unintended short-term consequences that the Fed’s prolonged ZIRP/QE program and its termination will wreak – rollover and convexity risk. These are the proverbial pigeons that will come home to roost if the US Federal Reserve stops its massive bond-buying spree and rates normalize.
Monthly Market Perspective - June 2016David Berger
The drivers of short-term market moves can be vastly different from those which underpin the cycles of longer-term market direction. This month we examine a variety of these factors.
Agcapita July 2013 - Central Banking's Scylla and CharybdisVeripath Partners
While I believe that eliminating QE is the right thing to do for the long-term health of the economy, the recent equity and bond market declines are but modest harbingers of the unintended short-term consequences that the Fed’s prolonged ZIRP/QE program and its termination will wreak – rollover and convexity risk. These are the proverbial pigeons that will come home to roost if the US Federal Reserve stops its massive bond-buying spree and rates normalize.
Monthly Market Perspective - June 2016David Berger
The drivers of short-term market moves can be vastly different from those which underpin the cycles of longer-term market direction. This month we examine a variety of these factors.
VSAT Conference London, 16-18 September 2015 - Antonio Bove, Director Product...Antonio Bove
Yahsat’s third satellite, Al Yah 3, is scheduled for service launch in early 2017, extending the company’s commercial Ka-band coverage to an additional 19 countries and 600 million users across Brazil and Africa. Al Yah 3 will cover more than 95% of Brazil’s population. Yahsat is committed in expanding its footprint in growing markets, strengthening Yahsat’s position as the world’s eighth largest operator in terms of revenue.
A war on thrift? A perversion of the natural order? A mad experiment? As more central banks push their deposit rate structures into negative territory, a vigorous debate has erupted among economists, investors and policy officials about the appropriateness, effectiveness and consequences of negative interest rates.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Interest Rates Explained 2024 What You Need to Know.docxAmit Kumar
Have you ever wondered why the stock market jumps on news about inflation, or why a government's decision to change interest rates sends the financial world into a frenzy? It's a complex dance, but at the heart of it lies the relationship between interest rates and the stock market. Understanding this connection is like decoding a secret language that can help you make smarter investment decisions. Get ready to explore how interest rate shifts shape businesses, consumer behaviour, and ultimately, the prices of stocks you see on the ticker.
From global economic trends to your own portfolio, interest rates hold surprising sway. Let's start with a timeline of major turning points in interest rate history – those moments that sent shockwaves through the markets…
Imagine you've taken out a loan to buy a house. The interest rate on that loan is essentially the extra cost you pay for borrowing the money. Let's say your interest rate increases. Now, your monthly payments go up, leaving you with less disposable income to spend elsewhere. This is just one-way interest rates touch our lives.
The Bigger Picture
At its core, an interest rate is the "price" of borrowing money. Banks charge interest on loans they give out, and they may offer interest on money you deposit with them. Governments even charge interest on bonds they issue! It's a crucial lever in the financial system, influencing how much businesses and consumers spend, save, and invest.
A truly unique example comes from Sweden. In 2009, to encourage borrowing and boost the economy during a financial crisis, the central bank implemented a negative interest rate policy. This meant people actually paid the bank to hold onto their money! While this might sound strange, it incentivized people to spend or invest their cash, which could stimulate economic activity. This policy wasn't without drawbacks, and Sweden eventually moved away from negative rates. But it serves as a fascinating illustration of how central banks can use interest rates as unconventional tools.
Types of Interest Rates
You'll often hear terms like:
• Repo Rate: The central bank (like India's RBI) sets this rate, at which it lends to commercial banks. Changes to the repo rate ripple through the economy.
• Reverse Repo Rate: The rate the central bank pays on banks' deposits with it. This helps manage the flow of money.
• Bank Lending Rates: Rates banks set on loans to businesses and individuals (mortgage rates, car loans, etc.)
Key takeaway: Interest rates are not one-size-fits-all. They play different roles, impacting our pockets and the broader economy.
Now that we understand what interest rates are, let's explore how changes in these rates can send ripple effects through the stock market.
How Interest Rates Affect the Stock Market
Businesses and Interest Rates
Businesses, the backbone of the stock market, feel the impact of interest rates in several ways:
Read full article at newspatron or download PDF.
World Currencies
Currently most—if not all—currencies are directly pegged to the US dollar with the
governance of a monetary standard. The variance in the effects of inflationary pressure—when
compared to the US dollar—is due to their value (purchasing power) and their central banks'
monetary policies. Today we have reports concerning the rise in value of various currencies
when compared to the US dollar. For the most part, this is due to the US dollar's rate of descent
due to its central bank's failure to raise the Fed Fund rate which would give some balance to its
devilish inflationary monetary policy.
Is the world heading towards an unprecedented zero-interest rate economy? In a globalized world like today’s, where economies are extremely interdependent,
relative prices are one of the most important key driver for increasing exports. An
appreciation of the domestic currency could scuttle export and bring the fragile economy
back to recession. This would happen if all the other countries decide to keep interest
rates steady. Is it rational to increase rates when all the others keep them steady? The
answer is clearly no. Following Dr. Keith Weiner’s theory of interest and price2
, a zero interest rate economy
can be regarded as a singularity point in Astrophysics. Once the interest rate falls to a
certain point known as “event horizon”, the theory says, then it cannot escape and rise.
Once that point is reached it becomes evident that (sovereign and private) debts cannot
be paid off, although the truth is that it was impossible to pay off them since the very
moment they were issued.
But resolving this legacy issue with continued application of past interventionist instruments does not incentivize the much needed structural reforms and private capital market activities. Financial repression has induced a re-allocation of capital across markets and greatly enhanced the role of public markets at the detriment of private market activities. Artificially low – or in some cases even negative – interest rates break the credit intermediation channel which can crowd out viable private investors.
1. This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion of our investment managers
at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no
indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private
Capital is an SEC Registered Investment Adviser. All charts courtesy of Bloomberg.
Thought for the Week (303):
Move Over ZIRP, Welcome NIRP
Synopsis
The Fed has maintained a Zero Interest Rate Policy (ZIRP) since the financial crisis of 2008, and the European Central Bank (ECB) recently announced a Negative Interest Rate Policy (NIRP).
A bank that offers a negative interest rate actually charges their customers to keep money with them, a rather counterintuitive business practice.
The goal of NIRP is nearly identical to ZIRP in that it is designed to spur economic activity by incentivizing banks to loan super cheap money to consumers and businesses.
What Is a Negative Interest Rate?
The Fed has maintained a Zero Interest Rate Policy (ZIRP) for over five years in order to help repair our economy from the damage caused by the financial crisis. The goal of ZIRP was to keep interest rates so low that companies would be enticed to borrow super cheap money to hire workers and grow their businesses.
Last week, the European Central Bank (ECB), which is the central bank for the Eurozone and analogous to our Fed, announced that they will be charging banks in the Eurozone a 0.10% interest rate to keep deposits with the ECB. Meaning, they have taken it a step further than our Fed and are actually charging banks to keep money deposited at the ECB.
NOTE: Think of the Fed and the ECB as a bank for banks. Bank of America, Deutsche Bank, Barclays, J.P. Morgan, and other large banks use the Fed and the ECB much as we use a bank. They store large amounts of money, called reserves, at central banks and when they need loans they can borrow directly from them.
In a normal world, banks pay depositors an interest rate and then loan these funds out to businesses and consumers at a higher interest rate for a profit. The bank’s goal is to earn a “spread”, which is the difference between the small business loan revenue of 5% and their cost to depositors of 1%. In this example, the bank would earn a spread of 4% on the total loan value (5% - 1% = 4%).
Therefore, if the small business loan is $1 million for 12 months, then the bank will earn 5% from the small business, or $50,000, and pay the depositors 1%, or $10,000. The total profit to the bank is then $40,000 ($50,000 - $10,000 = $40,000).
Simply put, a bank’s goal is to get as many deposits as possible because the more depositors that a bank can attract, the more money they have available to loan out to collect that spread.
The rate banks pay to depositors also varies based on competition. If the economy is on fire, banks are anxious to loan money and will pay higher deposit rates to attract consumers. In our example, a bank may increase its deposit rate to 3% from 1% to attract new customers. However, if the economy is slow, then they will offer a lower interest rate because they are not loaning as much money out to small businesses, etc.
2. This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion of our investment managers
at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no
indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private
Capital is an SEC Registered Investment Adviser. All charts courtesy of Bloomberg.
Since central banks act as banks for the banks that we use on a daily basis, the ECB is effectively telling European banks that they are going to start charging them to deposit money with the ECB. Imagine paying Bank of America to have the privilege of keeping your hard earned money on deposit with them!
Why Would the ECB Do Such a Move?
The ECB is now the first major global central bank to take interest rates into negative territory, and the reason for their decision is not unlike the reasons why the Fed has chosen to keep our interest rates artificially low.
Europe has experienced declining inflation while recovering from a deep recession for over two years. Currently, the ECB measures inflation in the Eurozone to be approximately 0.5%, which is far below the bank’s goal of 2.0%.
As counterintuitive as it may seem, some inflation is actually a very good component to a healthy economy because it signals that demand for goods exceeds supply. Demand can only be high if the economy is strong and consumers and businesses are spending money.
Typically a central bank wants inflation in the range of 2.0% – 2.5%, but when inflation creeps above 3.0% they will almost always act to cool down the economy. Much like an engine, an economy can overheat and cause a long list of problems.
Now if inflation continues to decline towards zero, then an economy can succumb to the gravitational pull of “deflation”. This is a scenario where prices for goods begin to decline, and as appealing as it may sound to pay less for goods, deflation is a very serious problem for an economy for three key reasons:
1. Save Instead of Spend: Consumers would rather save their money when prices are falling because goods cost less in the future than today. Given that consumer spending represents 70% of a developed country’s economy, recessions can occur quickly when consumers stop spending.
2. Debtors Get Hit: If deflation is rampant in an economy, wages will also likely fall. Those consumers and businesses that must pay interest and principal on existing loans now have a bigger burden to face as their debt becomes more difficult to pay off since their interest payments remain fixed but their income is declining.
3. Hard to Fix: Deflation is a real problem because central banks have limited ability to fix a deflationary environment. Japan endured two decades of deflation until last year when their central bank finally took drastic measures to attempt to reverse course.
The ECB is acutely aware of the risk of deflation, and they instituted NIRP in order to prevent any further move in that direction. By charging banks to keep money deposited at the ECB, they are trying to incentivize these banks in the Eurozone to loan money to businesses and individuals.
Cheap loans should cause businesses to hire new workers and buy new machinery, and consumers can get cheap mortgages and loans to buy new automobiles, etc. As the demand for these goods rise, inflation should kick in and ease the threat of deflation.
Lastly, notice that although the policies are different between the Fed and the ECB, the goal is the same, which is to incentivize banks to loan money and spur economic growth.
Implications for Investors
3. This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion of our investment managers
at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no
indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private
Capital is an SEC Registered Investment Adviser. All charts courtesy of Bloomberg.
Any policy designed to keep interest rates artificially low will continue this War Against Seniors and Savers. The world is so much more integrated today than even a decade ago, so what happens in Europe impacts investors here.
For example, European government bond yields have plummeted this year to levels close to where U.S. Treasury bonds currently reside. A few of these countries were at risk of default just two years ago, most notably Spain and Italy, and now markets are saying that these countries carry nearly the same default risk as the U.S.!
The bottom line is that the search for income has introduced a level of irrationality in markets that the Investment Committee feels is far too risky. Therefore, we continue to avoid investing in government debt because we feel that the risk/reward payoff is not favorable.
Furthermore, we do not anticipate Europe falling into a deflationary environment because the ECB has many more tools at their disposal if their NIRP fails to spark inflation. Although Europe is not as far along in their recovery as the U.S., they are moving in the right direction and the ECB will likely do whatever it takes to ensure the survival of the Eurozone.