Sunday, April 10, 2016
Deflation and negative rates
"During a leisurely stroll around Germany, one may encounter many strange sights but nothing would stranger than the following ad (courtesy of Peter Barkow) which promises negative 1% interest rates for consumer loans up to 24 months." This is discounting serious consumer price deflation over the next 2yrs, with loans like this attempting to stop customers from putting off purchases in the hope that prices will be cheaper in 2yrs time. Essentially, it is the market attempting to counter deflation expectations to shift people's time preference for purchase from the future to the present. And thus negative rates come not only from the central bank, no, they also come from market forces in a deflationary environment, to some extent.