Negative interest rates on the way?

somethingcorporate

Really interesting insight, thanks Clifford_Pope.

richbeth

Clifford_Pope wrote: »

I have never understood the mechanism whereby tinkering with interest rates is supposed to regulate the economy.

.

Hi,
I'm no expert but changing interest rates theoretically impacts the economy in a number of ways
1) It reduces people's mortgage/loan payments therefore giving many members of joe public more disposable income to go and spend on 'stuff' and more likely to borrow money
2) It reduces returns on savings reducing the income for some members of joe public and decreasing the incentive to save for others
3) the relative interest rate is one of the factors which impacts the strength/weakness of sterling against other currencies which impacts the relative price of British goods against our overseas competitors therefore impact sales and/or profitiabilty.

Also, when making investment decisions larger companies will compare the likely return of the investment so in marginal cases lower interest rates (for cash and loans) could make long term investments more favourable.

If you're a small exporting business the interest rate could have a massive impact upon tyou but I totally agree in individual cases of fast growing businesses it might not make an ioat of difference !

Of course as per my first line, this is all theoretical and as economists can't agree on the exact impact what hope do we have

Cheers,
Richard

HAMISH_MCTAVISH

Clifford_Pope wrote: »

Of all the factors that might influence my decision whether to borrow money for expansion, the current level of interest rates is the least relevant..

And now the other side of that coin.....

Let's say I work for a large PLC that borrows money to upgrade our facilities.

Lets also say we calculate the average Return on Investment from such upgrades to facilities will be 25% a year for 10 years before we need to invest again. We can borrow £50m at 6%, plus repaying 10% a year. Our margin is therefore 9%. On that basis, and even allowing for a safety margin the potential return outweighs the risk and we would proceed.

If we can't borrow the money at 6%, but instead must pay 10% or 12%, then the deal no longer makes sense and so we won't be upgrading our facilities, and that £50m will not be spent with the the contractors, architects, project managers, designers, equipment suppliers, etc.

The returns businesses can get from investing in capital projects do not change just because the interest rate does, and whilst a small business may well be able to spend £10,000 and generate £10,000 a year from that idea/investment/machine (making the interest rate less relevant), a big business may well spend £10,000,000 and only generate 20% a year from it, most of which will go towards repaying the loan (making the interest rate highly relevant).

Interest rates make a huge difference to the viability of capital expenditure for businesses, and so also to the wider economic health of the economy.

ILW

Presently, there is no issue with large multinationals being able to borrow, or the rates they are paying. Most are sitting back seeing how various economies are going before making large investments.

purch

Interesting article by Richard Woolnough on the Bond Vigilantes Blog also

http://www.bondvigilantes.com/2012/07/30/climate-change-bzirc-monetary-policy/

As investors we get used to living within certain recognised bounds. For example, it has been commonly assumed that interest rates cannot be sub-zero. There has been the odd historical quirk when we’ve seen negative rates (Switzerland in the 1970s), but that’s more for amusement than general investment consumption. However, there now appears to be the potential for a major investment climate change.

Theoretically, a negative interest rate sounds simple – you put £100 in the bank and you get £99 back a year later if the rate is -1%. A rational investor would of course have the alternative of simply keeping their cash under the mattress and not suffering the negative rate, although the incentive to behave rationally would be limited by the administrative burden and security risk of holding cash. The central bank could simply limit this activity by basically not printing enough cash. Therefore the vast majority of money would have to be held electronically and could therefore suffer a penal negative rate. Implementation of sub zero rates is possible.

Zero_Sum

purch wrote: »

. Therefore the vast majority of money would have to be held electronically and could therefore suffer a penal negative rate. Implementation of sub zero rates is possible.

transfer it to paypal or zopa?

sabretoothtigger

They can go broke so I guess that counts as investment. It appears on a company balance sheet so mission accomplished?

Negative interest rates on the way?

Dont we already have this. Inflation 2% and base rate is 0.5% so.... I make that negative anyway and its been that way since 2009 pretty much.

They wont actually make it obvious what is already happening, surely that would be labeling QE for the ticking time bomb it is and destroy possible further 'stimulus'
There is alot of trouble as soon government cannot sell bonds as cheaply, they have their goldilocks effect right now I think.

DiggerUK

sabretoothtigger wrote: »

........surely that would be labeling QE for the ticking time bomb it is and destroy possible further 'stimulus'....

As Mervyn King said today that zero growth is on the cards, we can take it as read that it is really going to be negative growth for a while yet.
So, if they can't do growth, then they will do what they can do....stimulate. With a side order of lower base rates highly possible.
..._

grizzly1911

DiggerUK wrote: »

As Mervyn King said today that zero growth is on the cards, we can take it as read that it is really going to be negative growth for a while yet.
So, if they can't do growth, then they will do what they can do....stimulate. With a side order of lower base rates highly possible.
..._

Government spending is just as likely. Interest rates are on the floor, anyway, many big corporates are sitting on cash piles and we have had QE

DiggerUK

grizzly1911 wrote: »

Government spending is just as likely. Interest rates are on the floor, anyway, many big corporates are sitting on cash piles and we have had QE

The corporate stashes may just start to be used if rates go to zirp; but will the share holders allow it, they will want their rake off first before risking it on investment in the business.
If cash asset stripping becomes the new game in town, then equities could get one hell of a sugar rush.
..._