Gold News

Negative Interest Rates: Ready to Play?

Gold prices, interest rates, and the Bank of England's inflation balloon...

So NEGATIVE INTEREST RATES are the latest balloon floated by the Bank of England, writes Adrian Ash at BullionVault.

That's an inflation balloon of course – just like the hot-air balloon featured in the Old Lady's sweet little game for kids on its website. Pushing the down button on your PC "fires up the burner," says the Bank in its instructions. "This puts hot air into the balloon, just like cutting Bank Rate puts more money into the economy."

Fire up the burner and the balloon inflates, rising higher. Fail to create inflation, and you crash into the ground. So, ready to play? Let's really get moving, says deputy governor (and former governor-in-waiting until the Libor scandal blew up) Paul Tucker, by making interest rates negative.

"Bizarre," says the BBC. "Extraordinary," gasps The Telegraph, repeating Tucker himself. "But all too common," sigh UK savers and pensioners.
Negative UK interest rates

"Negative interest an idea I have raised [at the policy committee]," said Paul Tucker to the Parliamentary Treasury Committee on Tuesday.

"I hope we will think," he managed to say between the chairman's interruptions, "about whether there are constraints to setting negative interest rates."

But if you view interest rates in the only way that matters – after accounting for inflation – there have been few constraints so far. By summer 2011 in fact, when the ultimate anti-cash known as gold hit record highs amid Eurozone meltdown and US debt downgrade, real UK interest rates were more negative than any time since the late 1970s.

See BullionVault's chart above, however. Real rates on household time-deposit accounts have crept higher, very nearly nudging zero for the fourth time since mid-2008. So yes, Tucker's negative-rate balloon is apparently floating towards commercial banks, who may be "forced to lend" if the Bank of England pays them less-than-zero on the reserves they hold with it. But his timing is telling, we think.

Because with UK government debt prices falling, and government interest rates therefore rising, the near-zero rates of the last five years are no longer enough. The UK just lost its triple-A credit rating, and 10-year gilt yields just bumped their highest level in a year. Hell, even household cash savers very nearly stand on the cusp of not losing real spending power today.

Hence the flattening of gold prices, perhaps. (Gold is, after all, what people buy when cash in the bank becomes a wasting asset.) Hence also Paul Tucker's bizarre, extraordinary and all-too obvious negative interest-rate plan.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals