Central Bankers are ruining the Savers

Ever since news broke out that RBS will start charging interest on deposits, many have voiced their concern. Among those, the most prominent was the chairman of RBS himself who was vociferous enough in expressing his views that if interest rates continue to fall or eventually become zero, then,the central bank would lose much of its clout over the mechanism to keep recession in check .

This being the first time that such a policy was adopted by charging interest for sterling holdings ever since BoE have reduced interest rates to 0.25 percent and have initiated QE measures for buying government bonds.

 

His comments came against backdrop of RBS, being forced to levy interest on cash deposits by customers. He was vociferous enough to point out that there is an urgent need to reframe monetary policy by central bank as interest rates get closer to zero and difficult to assess what impact easing out of QE will have on economy in days to come?

The thinking behind such a move by BoE may have been to ease monetary policy in order to support the economy and deter banks from stacking cash following the outcome of votes by Britons to leave EU.

Defending his decision that so far, most of RBS customer base of 8,50,000 are outside the ambit of paying interest on deposits but if the interest rates remain low for a long time the bank would be forced to charge interest from them. Indications are that in the present scenario such a move by central bank to charge negative interest from customers shall not go well with savers who are already reeling under pressure of low interest rates ever since BoE have reduced borrowing costs following financial crisis.

Barclays recently cut its interest rates to 0.05 percent from 0.25 percent and Santander too reduced interest rates by half citing reasons due to rising banking costs and prolonged low interest rates.

In Japan speculators without taking any risk are selling government bonds at higher prices to its central bank. BoJ so far has bought bonds to the tune of 80 trillion dollars . BoJ already owns 426 trillion yen of JGB (Japanese government bonds) that works out to half of its outstanding. As per estimates available Japan already has one quadrillion yen of government debt which works out to 230% of GDP. What is astonishing is that these bonds have no yield and so there are no prospects of repayment as these are no longer sovereign bond anymore.
Experts say that the best way to describe above scenario is BOJ is acting like a roach motel. A complex model in which BoJ continues to buy bonds that will not see light of the day. The outcome of these QE policies has resulted in inflating sovereign bond prices and caused an upheaval in global fixed income market.

The role of central Bankers (Kuroda, Yellen and Draghi) in inflating asset prices by their QE policies will come back to haunt them. Their policies have only helped the rich and the businesses who are borrowing at low rates and are able to leverage their portfolio to get higher returns, The Main Street, the savers who have always been told to save are facing the brunt of this.

Wall street journal has commented that this move by central bankers is cynical and is devoid of any logic against fundamental dynamics of modern welfare state democracies. Such a buying spree by central banks has reduced the availability of government debt for other buyers and this has intensified the bidding process further making investors jittery and the end result is that it is driving prices higher and yields lower. The yield on the benchmark 10-year Treasury note hit a record low earlier this year.

As on date central banks and speculators have driven the nearly $ 13 trillion of government debt which is roughly 30 percent of total outstanding into sub zero zone. The above figures include $ 1 trillion each of German and French government debt and $ 8 trillion of Japanese government debt.

The bitter and the most painful part is that majority share of government debt is no longer owned by real money savers at all and mostly owned by central banks, independent wealth funds and speculators.

At some point in time Central Bankers have to realize that with such low interest rates individuals are worried and they will rather not spend. Therefore the main objective of lower interest rates is ultimately lost.
Acknowledging the negative challenges of negative interest rates, BOJ Governor Kuroda said “there is no free lunch for any policy”. He also stated “that such developments can affect people’s confidence by causing concerns over the sustainability of the financial function in a broad sense, thereby negatively affecting economic activity.”

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