For anyone worrying about how to meet the next mortgage payment, or how they will ever borrow enough to buy a shoebox masquerading as a flat in east London, here is some cheering news. A bank in Denmark is now paying customers to borrow money.
Nordea Credit is now charging some mortgage borrowers a negative interest rate on their loans. In effect, instead of you paying the bank, it pays you (although there are still some administration charges it's a bank, after all). This is the through-the-looking-glass world of negative interest rates and it may not be long before it arrives in the UK.
There is no zero bound
It used to be assumed that interest rates were limited by what economists call the "zero lower bound". While there was no limit to how high a central bank could push rates if it wanted to, it couldn't ever take them below zero. But since the financial crisis, that idea has gone out of the window.
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Two major European countries have now taken rates negative. The Swiss National Bank took rates down to -0.25% last year and in January took them down again to -0.75%. In some cases, it'll now cost you money to have cash on deposit in Switzerland. Denmark has made the same move, last week pushing rates to -0.5%. The lower bound has been decisively broken.
In Britain, we're still debating about when the Bank of England will finallyget around to raising rates from what were meant to be emergency lows.But are we really so radically different from the Swiss or the Danes? There is no reason why the Bank which has jumped enthusiastically on every other central-banking fad going wouldn't cut rates too. And there are several pressures building that might drive it to do so.
The Swiss and the Danes are mainly trying to stop their currencies from rising too fast against the euro (or maintaining a peg to the euro, in the case of the Danes). This would damage their exporters in their biggest market.
But you can say the same for the UK. The pound has already started climbing against the euro,and as the European Central Bank (ECB) cranks up its printing presses, that is likely to continue. Europe is the biggest market for our exporters too, accounting for half of what we sell abroad. Negative rates might be the only way of stopping the pound from going too high.
Crisis candidates
And what happens if there is another shock to the global economy? Greece or Russia could default, or the Chinese economy could crash there is no shortage of crisis candidates. The Bank of England wouldn't have any tools left in its locker to counter the recession that might follow except for taking interest rates negative.
Finally, what happens if deflation takes hold? We're not there yet but with the oil-price slump, we might be soon. If prices start to fall significantly, then negative interest rates may not seem so crazy. If deflation is running at -2% a year, then even an interest rate of 0.5% works out at 2.5% in "real" (after inflation) terms, high by current global standards.
No doubt the Bank would rather get inflation back up to its target rate of 2%. But if it can't do that and it doesn't seem to have much influence on inflation one way or the other anymore then negative rates might be the only option. In short, negative rates cannot be ruled out. They are not likely, but neither are they impossible it is not as if Denmark and Switzerland are radically different economies to ours.
Negative interest rates are a dangerous idea
That said, let's hope we don't end up going through the looking glass, because it is very hard to see negative rates as being anything other than damaging to our economy. Just think about the medium-term consequences. Savers will be punished even more than they have been. We might have to pay to keep cash in the bank. That can only discourage saving even more, as well as hitting anyone living on their savings.
Worse, it will encourage both governments and individuals to take on even more debt. Why get the deficit down when you can borrow money from the bond market at less than nothing? The UK is not there yet, but many German bonds now have negative yields. Government profligacy will be encouraged the last thing the UK needs.
As for what negative rates might do for the UK's already weird property market, it hardly bears thinking about. If building societies start paying people to take out mortgages, then the market will be even more unhinged than it already is and much of the market was already fairly over-leveraged even when people had to pay for the money.
But just because it is a bad idea does not mean it won't happen. You could have made many of the same arguments against near-zero rates and quantitative easing yet both have come to be seen as perfectly normal. Just don't be surprised if the UK joins Switzerland and Denmark on the other side of the zero bound.
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