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The unintended consequences of rate cuts

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The unintended consequences of rate cuts

Repeated interest rate cutting by central banks around the world was supposed to drive consumer spending and boost economic growth. But recent research suggests the cuts are having the opposite effect – household savings rates in many OECD countries are on the rise.

The issue of low and negative interest rates across the globe has been topical for quite some time now, and I think for the most part we know why central banks around the world keep cutting rates and providing liquidity in various forms. After all, as money becomes cheaper and easier for consumers and businesses to get their hands on they should spend and invest more, jump-starting economic growth, employment and inflation. The financial and psychological boost that comes with rising asset prices should provide even more confidence to borrow and spend. Interestingly, but maybe not surprisingly, it seems the exact opposite is happening.

According to a recent Wall Street Journal article based on data from the Organisation for Economic Co-operation and Development, Moody’s and corporate regulatory filings consumers in countries with negative rates are actually saving more now than in 1995. The household savings rates in Germany (10-year bond yield of minus 0.11 percent), Japan (minus 0.10 percent), Switzerland (minus 0.56 percent), Denmark (minus 0.05 percent) and Sweden (negative short term policy rate) have all been on an upward trend recently. Of these 5 countries, only Japan’s consumers are saving less of their income today than they were two decades ago. And a measure of corporate cash coffers compared to revenues for Europe and neighbouring countries has been climbing over the past 5 years. At the end of 2015 the ratio was at a level not seen since 2010, representing almost 1 trillion Euros in corporate bank accounts.


Source Wall Street Journal 

This outcome is not entirely surprising. To begin with many developed nations have old and ageing populations. They are characteristically savers not spenders. As the return on their accumulated assets and pensions declines with low interest rates they have less to spend and require a greater nest egg for the future. This encourages saving.

Workers are faced with the same problem, yet it is compounded by the slow state of the current and projected economic environments. When central banks, government officials and the financial community have low expectations for economic prosperity, the confidence of businesses and consumers is also sure to fall. Confidence in the economy is a necessary condition for spending, and today’s lack of confidence means more saving.

Unfortunately for central bankers hoping to boost spending by offering cheap loans, they may have only boosted the incentive to squirrel away even more money. Counterintuitively, higher rather than lower interest rates may be the key to stimulating these economies. But that has a whole other set of issues to deal with.

Christopher Demasi is a Portfolio Manager with Montgomery Global Investment Management. To invest with Montgomery domestically and globally, find out more.


Christopher is a Portfolio Manager for the Montaka funds and the Montgomery Global funds. He joined MGIM at establishment in 2015.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. Hi
    Japan have tried low interest rates over last 20 years together with an aging population. It hasn’t been a success as logically people see they have to save more to get an income after retiring with low interest rates. Central bankers are repeating the mistakes.Also, Japan invested lots in infrastructure but I have read lots was misplaced etc because of politics like bridges/trains to no-where, so, there aren’t any easy solutions.

  2. Hi Chris, yes your article makes it obvious the lack of understanding governments and central banks have around this whole issue as big as it is,and Jason’s comment “what viable infrastructure projects exist in Australia” is the very question we should be asking and trying to answer because that’s the real issue ,nothing’s viable here anymore because we have become paralysed slowly over decades of red green orange and every other colour you can think of that tape comes in .the problem is over regulation in every area that is why asia is eating us alive along with the U.S. and many other countries we are choking our selfs ,just ask anyone who’s hands on in small to medium business ,we live in one of the luckiest countries blessed with resorses and massive productive farming lands but we cannot compete in manufacturing or very much else because of our love of regulation it’s really quite obvious and people like Donald Trump and their popularity are symptoms of that fact we can no longer afford the socialist agenda, it doesn’t pay well and we have bills to settle.

  3. roger-farquhar

    Due to various forces most govts are reluctant to use fiscal policy to stimulate the economy, the advice given by the money people has been to reduce govt debt (the IMF has said that they were wrong on austerity policy but politics has yet to catch up). The load has shifted onto monetary policy and central banks are doing their best to fill the gap.

    • Its no longer easy for central banks to ramp up QE. The BOJ for example already owns 35% of the Japanese bond market and their primary dealers are running out of willings elders which means they are hitting capacity constraints. Given this the search is now on for other forms of stimulus. Fiscal policy is on the radar either financed through government borrowing or via the central banks, what everyone is now calling Helicopter Money. One argument is that no matter what variety of fiscal stimulus is adopted it is likely to lift bond yields. If either succeed in stimulating growth, presumably that would pt upward pressure on long bond rates.

  4. Roger and Chris, can you see an alternative scenario to the ‘supernova’ some speak of when bond prices unwind and yields rise?

    Could it be that major technological breakthroughs just over the horizon cause productivity increases on a scale not seen since the industrial revolution, which lead to economic growth and a slow but steady normalisation of interest rates?

    • I wonder how that would play out, Currently technological breakthroughs are causing more income inequality which mean less spending for the average & below = less money moving around the economy which is turning into more savings.

      I think universal basic income would help by giving the people more money to use in the economy, but politically i don’t think the majority is ready for this yet.

      At some point i guess something has to give.

  5. Hello, I attended a luncheon yesterday in Brisbane with the Westpac economist Bill Evans as guest speaker. Bill, as did the outgoing Reserve Bank Governor I understand from media releases, has recommended governments “spend more” to help the economy. And the word “infrastructure” and the low rates on offer to facilitate infrastructure seems to be a common theme. Could you help me out as I wanted to ask this question yesterday at the luncheon but time ran out – specifically what viable infrastructure projects exist in Australia? Is it just road related, I take it developing ports is lower in priority due to the mining downturn? If you were Malcolm Turnbull or Scott Morrison, and I remember Roger saying some time ago the government would do well to borrow and spend, what projects would you consider? Thanks Jason

    • Here at the blog in 2013 I wrote “What I am talking about is our need to borrow money now to make serious infrastructure investments today. Inflation ensures that deferring projects makes them more expensive in the future – so while the government dithers, decades pass and the opportunity to fix, for example, the Spit Bridge, becomes unaffordable and is missed.” Unfortunately a parliament require 9 of the 11 cross benches to vote with the government and a 3 year term means nothing will or can happen for another three years. You can read the full article at: http://rogermontgomery.com/going-to-the-dogs-debt-free/

  6. Great subject to tackle Chris. Perversely, by cutting rates, central banks are in fact tightening rather than loosening. One has to wonder whether further evidence of increasing savings will prompt them to tighten rates or at least cease their bond purchasing programs and allow long bond rates to rise, encouraging investment.

    • Hi Roger,

      When you say central banks are tightening, in the traditional sense that would mean raising rates and essentially restricting the money supply in the economy.
      If that is your assessment that then they are effectively lowering liquidity in the economy and hence lending. Would you agree?

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