Newspaper article The Evening Standard (London, England)

Beware the Black Hole of Negative Interest Rates; ECONOMIC ANALYSIS

Newspaper article The Evening Standard (London, England)

Beware the Black Hole of Negative Interest Rates; ECONOMIC ANALYSIS

Article excerpt

Byline: Simon Derrick

ONE of the main problems astronomers face when studying black holes is that these bodies exhibit such strong gravitational effects that nothing -- including light -- can escape them. Instead, those studying them have to infer the presence of a black hole through the odd gravitational effects around it.

Curiously, over the past two years, currency markets have exhibited their own version of these odd gravitational effects. Currencies which should have weakened have, instead, strengthened, and tiny interest-rate moves have created high levels of volatility.

Major geopolitical events -- such as Syria's conflict, for example -- have been almost completely ignored, but shifts in currency policy have prompted significant fear among investors. So, where's the currency-market equivalent of a black hole that's driving these strange movements? The big clue is that the point at which everything began to change was the summer of 2014. June of that year was also when the European Central Bank became the first G8 central bank to impose a negative deposit rate, in effect charging banks to hold deposits with it. Since then, the ECB has lowered its deposit rate three more times (it now stands at minus-0.4%). This, in turn, has been followed by moves into negative territory by the Swiss, Danish and Japanese.

Why should this matter? Well, imagine you are an investor with [euro]100 sitting in the bank and that if you leave it there you will have just [euro]99.60 in a year's time. Though you might decide the best thing to do is to spend the money, many people will still want to save. So where to put the money? In the past a European investor might have put the money into something safe such as German government bonds. But that's no longer attractive as you now pay close to half a percent per annum for the privilege of lending to Berlin for the next two years.

If you decide to be a little more adventurous and lend money to the Italian government over the same period, the best you can hope for is a 0.02% interest rate. You can get close to 0.5% on two-year UK government bonds and, should you be prepared to look overseas, nearly 0. …

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