Financial imbecile seeking advice (negative interest rates)

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 broken spectre 27 Jul 2016
Don't interest rates spiral out of control in difficult times?.. Folks paying for loaves of bread during WW2 with wheelbarrows full of cash for example? Yet here we are post-brexit with negative interest rates. Can anyone educate me as to what's happening?
 Dave the Rave 27 Jul 2016
In reply to broken spectre:

Possibly because they want people to borrow to cause growth then feck them in the arse by putting the rates up in a few years?
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In reply to Dave the Rave:

Right... I wont be taking out any payday loans for the foreseeable then!
 Postmanpat 27 Jul 2016
In reply to broken spectre:

The central banks have reduced the price of money (lower interest rates) and "printed money" by quantitive easing. However, because there is a lack of confidence and therefore demand in the economy, and because the banks have been focused on rebuilding their balance sheets rather than lending , so lending has not increased. Most of the increased cash in the banks has been parked in reserves.

Without an increase in lending so demand never recovers and without demand prices will not rise. The exception to this is in asset prices in which their has been inflation.
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Gone for good 27 Jul 2016
In reply to broken spectre:

> Don't interest rates spiral out of control in difficult times?.. Folks paying for loaves of bread during WW2 with wheelbarrows full of cash for example? Yet here we are post-brexit with negative interest rates. Can anyone educate me as to what's happening?


Folks paying for a loaf of bread with a wheelbarrow full of deutsch marks was due to hyper inflation not low or negative interest rates.
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In reply to Gone for good:

> Folks paying for a loaf of bread with a wheelbarrow full of deutsch marks was due to hyper inflation not low or negative interest rates.

I never knew that there was a difference (between interest rates and inflation). Thanks for your response - I understand economics less than I thought I did!
 Postmanpat 27 Jul 2016
In reply to broken spectre:

> I never knew that there was a difference (between interest rates and inflation). Thanks for your response - I understand economics less than I thought I did!

I thought it was a mistyping in your OP, sorry. Inflation is a measure of prices of goods (or, in some cases, assets). Interest rates are the charge for borrowing money (in a sense, the price of money). They are related but not the same.
The normal assumption is that low interest rates will result in higher prices (inflation) at which point interest rates are raised to stabilise prices. I was explaining why this hasn't worked this time.
 Max factor 28 Jul 2016
In reply to broken spectre:
it's a policy tool. If you're effectively paying the bank to keep your money there you are more likely to take it out and spend it, so giving the economy a kick in the arse.

The era of low rates came following the financial crisis to protect borrowers who had overextended themselves. In particular the banks, who have spent the last 10 years or so deleveraging (lending and therefore borrowing less).
Post edited at 09:38
 John H Bull 28 Jul 2016
In reply to Max factor:

> The era of low rates came following the financial crisis to protect borrowers who had overextended themselves. In particular the banks, who have spent the last 10 years or so deleveraging (lending and therefore borrowing less).

One aspect of this baffles me: if houshold/individual debt is about as high as it was 10 years ago, and people generally don't want to get into any more debt, how are they going to ever be persuaded to spend more?

Unless, of course, negative interest rates mean negative interest on debt...we live in strange times but not that strange...



 John_Hat 28 Jul 2016
In reply to bullybones:

> Unless, of course, negative interest rates mean negative interest on debt...we live in strange times but not that strange...

Indeed, not that strange. A couple of friends have tracker mortgages that track below the base rate, so, in theory, would be in a negative interest scenario. The banks stop reducing the interest at zero, so they have interest-free mortgages, as opposed to negative interest mortgages.

To the OP, from a negative bank base rate point of view, the bank requires banks to deposit money with the BoE as a cash buffer. It pays the banks base rate on that money.

However most banks are currently hoarding cash considerably above the minimum amount they are required to hold, as we are in a time of uncertainty, and, like an individual, when things are uncertain, they play safe and don't take risks. If they don't lend it, then people can't borrow it.

By charging the banks for depositing money (by making the interest rate negative) the BoE is trying to make the profit motive outweigh the caution motive.
 neilh 28 Jul 2016
In reply to John_Hat:

Are banks not hoarding cash because( 1) the govt wants them to to improve their assets ( 2) there is not the demand from the economy to borrow money?Cerianly as long as you have a reaonable business the banks are willing to lend, I would almost say they are bending over backwards to lend.

 ian caton 28 Jul 2016
In reply to broken spectre:
The central bankers would argue low interest rates are a result of excess saving by China and other eastern countries. Once they have somewhere else safe to put it, other than western gov debt, interest rates will rise. Unless they decide that the UK is no longer a safe bet, in which case our interest rates will rise sooner than the rest of the world. We do after all rely on the "kindness of strangers" to fund our life style, as Carney put it.
Post edited at 16:49
 John_Hat 28 Jul 2016
In reply to neilh:

When I said "uncertain times" I included politically uncertain times as well. So, for example, I would imagine that many bankers are well aware the PRA might suddently increase the amount of capital it requires.

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