Are negative interest rates the new abnormal?

Many individual and institutional investors rely on money market funds to hold cash, knowing that they can access that liquidity easily, and that it will maintain a steady asset value, even if it doesn’t generate much yield in a low interest rate environment.

Wallace says if money market funds had to pay to own short-term unsecured promissory notes, or commercial paper, they would not be able maintain a stable net asset value and the economic model breaks down. This may result in investors in these funds preferring to hold deposits at a bank or even cash rather than suffer the drag of negative interest rates and credit conditions would likely tighten as a result.

“In this scenario, the metaphor of money under the mattress becomes a reality and crimes such as robbery, petty theft and money laundering would likely rise substantially,” Wallace says.

As a last resort to unresponsive NIRPs, countries could eventually even look at the possibility of implementing ‘helicopter money’ to boost their economies.

Helicopter money is a concept already being considered by some European and North American countries in which, for example, the government gives a basic income to each of its citizens in an effort to stimulate spending and halt deflation. The phrase comes from the idea that the government is metaphorically throwing money from a helicopter to spread among its people to go out and spend.

“In countries adopting NIRPs, financial institutions and firms are grappling with previously unknown technical, legal and risk management issues thrown up by negative rates. This is forcing them to adapt or redesign their IT systems, redevelop spreadsheets and tax compliance processes, and redraft legal contracts.”

Wallace concludes that although the effects of low or negative interest rates will have an impact on the global economy, including South Africa, the effects are quite far off considering the country’s problems with high inflation, rising interest rates and interesting politics. Therefore the money market proposition for domestic treasurers and investors remains strongly intact.