JPM's Striking Forecast: ECB Could Cut Rates To -4.5%; BOJ To -3.45%; Fed To -1.3%

Tyler Durden's picture

One week ago, in the aftermath of Japan joining the NIRP club, we wondered how low Kuroda could cut rates if he was so inclined. The answer was surprising: according to a Nomura analysis the lower bound was limited by gold storage costs. This is what the Japanese bank, whose profit was recently slammed by Japan's ultra low rates, said:

"theoretically, negative interest rates' lower bound depends partly on the cost of holding cash in the form of physical currency. When people hold cash out of aversion to negative interest rates, they risk losses due to theft and the like. The cost of avoiding this risk could be a key determinant of negative interest rates' lower bound, but it is hard to directly quantify. As a proxy for the cost of holding physical currency, we estimated the cost of storing gold based on gold futures prices. This cost has averaged an annualized 2.4% over the past 20 years, though it has varied widely over this timeframe."


Which, in conjunction with Kuroda's promises that "Japan will cut negative rates further if needed", raised flags: once the global race to debase accelerates, and every other NIRP bank joins in, will global rates be ultimately cut so low as to make a "gold standard" an implicit alternative to a world drowning in NIRP?

According to a just released report by JPMorgan, the answer is even scarier. In the analysis published late on Tuesday by JPM's Malcolm Barr and Bruce Kasman, negative rates could go far lower than not only prevailing negative rates, but well below gold storage costs as well.

JPM justifies this by suggesting that the solution to a NIRP world where bank net interest margins are crushed by subzero rates, is a tiered system as already deployed by the Bank of Japan and in some places of Europe, whereby only a portion of reserves are subjected to negative rates.

Which leads to the shocker: JPM estimates that if the ECB just focused on reserves equivalent to 2% of gross domestic product it could slice the rate it charges on bank deposits to -4.5%. Alternatively, if the ECB were to concentrate on 25% of reserves, it would be able to cut as low as -4.64%.  That compares with minus 0.3% today and the minus 0.7% JPMorgan says it could reach by the middle of this year as reported yesterday.

In Japan, JPM calculates that the BOJ could go as low as -3.45% while Sweden’s is likely -3.27%.

Finally, if and when the Fed joins the monetary twilight race, it could cut to -1.3% and the Bank of England to -2.69%.

As Bloomberg adds, easing the fall is that the JPMorgan economists bet that banks are unlikely to be able to pass on the cost of the policy to borrowers, reducing potential repercussions. They also see limited pressure on bank profits or for a need to stash cash. On the other hand, DB has suggested that it is time to pass on NIRP to depositors in the most aggressive forms possible.

While Barr and Kasman still expect policy makers to tread carefully, such analysis may temper the recent fear of investors that after seven years of interest rates around zero and bumper bond-buying, central banks are now out of ammunition. Indeed, a fuller embrace of negative rates could “produce significant reductions in market rates,” said the economists.


“It appears to us there is a lot of room for central banks to probe how low rates can go,” they said. “While there are substantial constraints on policymakers, we believe it would be a mistake to underestimate their capacity to act and innovate.”

Here are the key observations by JPM:

  • Sluggish growth and low inflation is building the case for further DM monetary policy stimulus. With term premia and forward rate expectations compressed, the benefits of additional QE and forward guidance is likely to be limited.
  • The alternative of negative interest rate policy (NIRP) has been viewed as constrained as banks, corporates and households can increase holdings of zero-yielding physical currency when rates move negative.
  • Innovations by central banks in Europe and Japan have enabled central banks to push policy rates well below zero. Using a tiered deposit scheme, deposit rates have fallen as low as -0.75% in Europe with no significant signs of a move into cash.
  • Our analysis suggests that the use of these schemes could allow for considerably lower policy rates without undue pressure on bank profitability or creating a powerful incentive to move into cash.
  • Calibrations based on Swiss experience suggest that with modest changes to the reserve regime, the policy rate in the Euro area could, in principle, go as low as -4.5%.
  • Estimated bounds for the US (-1.3%) and UK (-2.5%) are higher, reflecting their larger bank reserve to asset ratios. We believe this bound is not binding and that rates could fall further in both cases.
  • To date, markets price only a small probability of sustained NIRP of -0.75% or lower in the G4. This suggests that a strong signal that policymakers are willing to actively use NIRP could produce significant reductions in market interest rates.
  • The actual transmission of NIRP is likely to be muted as we expect household deposit rates to remain sticky around zero which will limit pass-through of NIRP through the retail banking sector.
  • Central banks are also likely to move cautiously into NIRP as they are sensitive to the uncertain consequences of these policies on local markets. This suggests their response to weakness may prove slower than in the past.
  • Having put in place a three tiered deposit system and facing a significant inflation undershoot, the Bank of Japan is expected to lower its deposit rate to -0.5% alongside additional QQE this year.

Recall that JPM yesterday set the bogey on the one event that could prompt Yellen to go NIRP: a recession. Here is the latest take by JPMorgan on this:

With IOER at 0.5% and the Fed maintaining concerns about US money markets, the US is not close to considering NIRP. However, if recession risks were realized, the need for substantial additional policy support would likely push the Fed towards NIRP.

In other words, once the Fed makes up its mind, all that will be needed is for economic "data" to turn even more severely southward thus giving Yelen the required political cover to join the final lap of the global race to debase.

Finally, here is the summary table of where to look for the real negative lower bound.

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NoDebt's picture

-4.5%?  Well there's your Lehman moment when every money market in the world breaks the buck thanks to NIRP.


DaddyO's picture

Just contemplate the concept of negative rates for a moment...

20 years ago talk of this would have relegated you to the looney bin where you could play with your tin foil hat!


NoDebt's picture

The insanity of the idea has never changed.  The insanity of the world's CBs has.


McCormick No. 9's picture

How the fuck do negative interest rates actually work? At 4.5%, this would mean the bank gives me 540.00 a month for every 100,000 I borroe from them.


gatorengineer's picture

It would do wonders for the default rate.....

SWRichmond's picture

Negative rates = more overt theft, more overt than earlier.  Theft by the system, from you.  negative rates = cash ban, which they want to do anyway to facilitate their theft from you.


Got it?  You still have money they haven't yet stolen from you, and they mean to rectify that.

Durrmockracy's picture
Durrmockracy (not verified) SWRichmond Feb 10, 2016 9:21 AM

I see some "value investor" or "bargain hunter" is helpiing Deutsche out this morning?

Keyser's picture

They better outlaw cash BEFORE they dip too deeply into depositor's pocketbooks with negative rates... Can you say, run on the banks... 

Mr.Sono's picture

When you think they can't get any more stupider......they come out with this.

Durrmockracy's picture
Durrmockracy (not verified) Mr.Sono Feb 10, 2016 9:41 AM

Why do they think that people who haven't played in the stock market at ZERO are suddenly going to feel inspired about NIRP?

They are more likely to empty their accounts on cheesy poofs and cat food than stawks.

1000 splendid suns's picture

This all will make/entice people to take out huge loans at zero percent. There's your money creation, there's your inflation, there's your continued ponzi.

TheDanimal's picture

I've been extremely careful to do nothing to further degrade my already piss poor credit score in the hopes of this.  I would gladly throw myself at that ponzi.  Good God, I would actually be responsible about it too.  Why wouldn't you want to be rewarded for actually paying on time the whole loan by receiving a substantial discount on the total amount paid? 

BeerMe's picture

NIRP isn't happening on any loans you take from the bank.  It will happen on any money you loan the bank.  They'll take a percentage of your deposit but still charge you 6% on your loan.

JRobby's picture

They just don't know when to quit.

They need to review that "number line" and "negative minus positive" stuff from 6th grade. You know?

bania's picture

-4.5%??? That's a true "Purple NIRPle"!!!

Cognitive Dissonance's picture

And yet somehow I think -4.5% wouldn't actually be considered full retard. There are always lower depths to plumb.

BorisTheBlade's picture

There are always complex numbers to consider with compound interest being negative or positive depending on whether it's an even or an uneven year. It would be quite entertaining if it wasn't so redistributionary and destructive to the real economy. Could you as a person get a negative interest loan? Nope, neither can I. Anyone's head should spin 360 degrees on the thought anybody would pay me for me to use their moneys for a period of time. And yet that's what CBs are doing with the banking system, nothing more that a giant debt collapsar.

J Jason Djfmam's picture

Once they got to zero, you would have thought, this is it.

They talk negative rates, but I don't hear any helicopters.

BarkingCat's picture

Once they go that way there is no policy limits to further reduction.

Given that these are interest rates and not tax rates they could conceivably go above 100%.  100% simply means that in 1 year all your money would be gone.

..and this is using simple and not compound interest.


...I just caught a mistake in the paragraph above. I decided to leave it and make this note instead as it shows something. My natural inclination led me to write "above 100%". I really should have written " below -100%". The concept of negative interest rates is so alien that lifetime of conditioning is not easily ignored.

DaddyO's picture

The key word here is "negative"...

If in a normal world the bank pays you interest on you deposits, then the "negative" of that is what?


pods's picture

I'm cleaning out an old closet to handle all the bank's deposits I will soon see. :)


DaddyO's picture

I would suggest that you sh*t in one hand and wish in the other and see which one fills up first...


Kirk2NCC1701's picture

Soon we'll all be Closet Bankers.

BeerMe's picture

Might get a large fire proof safe and bolt it to the floor.

Antifaschistische's picture

all the .gov taxes take 50% of your, the banks will tax/scalp/confiscate 5% of every dollar you have., they won't pay you to borrow because they need your CASH...that's the target.  The BEAST is hungry, and it's coming after your stash.

strateshooter's picture

What happens when we al stampede to spend our cash ?
inflation+ nobody has any cash left to buy shit with or to keep spending.
Then we all have to load up on debt again.
Then what?
IRs suddenly at 15%?
the BEAST is too powerful.It is shaping our behaviour and has too much control over lives.
The BEASt needs to hunted down and killed.
But hOw, without being labelled a terrorist.
It is a poor state of affairs when self defence becomes an act of terrorism.
Wall St and the Banks need to be taken out.
VOTE BERNIE !! Feel the Bern !!!

cheech_wizard's picture

>VOTE BERNIE !! Feel the Bern !!!

Automatic downvote. In fact, mentioning voting for Bernie should get you dragged to the basement, and electrodes applied to your testicles.

TheReplacement's picture

As somenone who didn't vote yesterday, I disagree.  Bernie is perfect.  There is no saving this system.  Let it Bern and with Bernie it will most certainly burn.

strateshooter's picture


Whoa Dammit's picture

The banks want to force you to buy stawks. So they can conveniently make you lose all of your stash.

I don't think the banks  are looking at what will happen to their fractional reserve lending when they have no deposits.

Kirk2NCC1701's picture

It's worse than that: this only gives them official Cover for increasing the ZIRP that's already in place, which consists of Account Fees.

Twox2's picture

That happens in the parallel universe. You have to go through a black hole to get it.


Winston Churchill's picture

You still pay +29.9%, so the spread is +34.8%.

XAU XAG's picture

Thank You Winston


Peeps forget the spread!


Banks have been making out like bandets since 0.5%.................they have never had such a spread.


Of course they still cannot make enough to cover the........................drum roll...........................BAD DEBT

Kirk2NCC1701's picture

And the accused Madoff of running a Ponzi, when they wondered how he could provide 10-15% ROI on Deposits.

He was 100% right, when he said "THEY run the biggest Ponzi of all time!".

Madoff's "crime", for which they jailed him, was to rip off fellow Jews, as it is intolerable for them to have someone run a Ponzi on the Ponzi Tribe itself. "Oh vey, the humanity, the humanity!"

Ghordius's picture

"How the fuck do negative interest rates actually work?" ahhh... bananas! I mean, a good question

currently, two different worlds of NIRP

- a real and existing one of Denmark, the eurozone, Japan, etc. where NIRP means that the CB slaps the banks and megabanks with a punitive rate for keeping "excess reserves" on the account of the CB. with the urging that they ought to lend more

- a phantasy one like what JPM is dreaming of where NIRP means that the banks slap punitive rates on customer's accounts "because the FED told us so"

add to that the reality of the main rates which central banks usually pretend to set, while it's only a kind of "target" for inter-bank lending, and you start to realize that the same words and concepts... differ from currency zone to currency zone

"I urge you to go out for shopping!" said the burning bush in 2001, or something similar

picture the scene of Indiana Jones where he encounters Hitler. now subtract the books, and imagine a bonfire of evil, evil banknotes. same music complete with "Klingelspiel" instruments


TheLazyNative's picture

i think so. since the intent is to increase liquidity and investment. it's an approach that would put banks into a deeper hole than they are now. it's completely nuts.

MaxMax's picture

Umm - no.  That's the amount of money they will charge you on deposits.  Since you aren't as credit worthy as them, they have to have a spread that will always be big enough so that they can charge you money if you borrow.  That's the plan - charge you if you deposit money, and charge you if you borrow money.  Very simple.

BarkingCat's picture

and with that the peer to peer landing will increase.

Stackers's picture

I'll glady pay you today for a hamburger sometime next year

wildbad's picture

right on wimpy.

any interest rate below the true rate of inflation is usery which is theft.

gatorengineer's picture

and we havent been their for the last 7 or 8 years?

herkomilchen's picture

It's the money printing that's the theft.

strateshooter's picture

Sometimes I read this shit and I it just me ?
The CBs are leading U.S. Into a parallel dimension.A twilight zone where the laws of financial physics no apply.
Total fucking madness.I also guess this is why I am seeing more and more articles proposing to ban cash.
I reckon gold, property is the only haven now.Everything else is bullshit.
The bankers have killed their product ..MONEY and DEBT.
Neither have value anymore.

Antifaschistische's picture

they are doing multiple, feeding their need for money.   two, penalizing cash and forcing the big boys to buy treasuries, debt, etc.   AAPL, for example, can't just park 30bill in the bank without getting scalped....

new game's picture

they fucking killed the family cow. no moar milk. how fucking dumb is that? but wait, they have this thing call the gov and the johnny law to enforce our non=compliance of theft by them the fucking  thieves. sumtin like what ya gonna do when they cum knokin, bad fucking bankers, bad bankers...

J Jason Djfmam's picture

All there is left to milk is bulls.

Boris Badenov's picture

Think about it as a yearly tax on money you've already paid tax on! The banks think they are the IRS? They do not have that right. This is not going to end well.

new game's picture

sum tin tells me they will do whatever they want and the average 8th grade educated sheeple will not know wtf really happened 'cet "we got less money honey"...

BarkingCat's picture

the dumb sheeple have no money. They live paycheck to paycheck..

For those fuckers there will likely be higher fees on banking transactions.