Accentuate the Negative?

Who would have thought that we'd ever be talking about negative interest rates? Now we have to, because in many places, they’ve become a fact of life.

In 2014, the European Central Bank stunned the financial world by announcing that it would lower its deposit interest rate below zero (it currently stands at -0.4%). The Bank of Japan went negative in January of this year. Sweden, Denmark, and Switzerland have adopted negative-rate strategies of their own. And while the likelihood of negative rates in the U.S. seems small, the Federal Reserve has said it doesn’t rule out using them for emergency stimulus in an economic crisis.

This in theory is what negative interest rates are supposed to do: drive cash back into the economy by making cash expensive to sit on. It's too soon to know how well the idea works, if it works at all. In any case, most of the impact so far has been on government bonds and currency valuations, with little trickle-down for consumer and business banking.

But, what if banks were to start telling printing and packaging businesses that instead of earning interest on cash in deposit, they now would have to pay the banks to hold the money for them? It wouldn’t be good news, but we don’t see it as a disaster either for individual companies or for the industry as a whole.

A lot depends on the movement of the rate. A negative one-tenth of a percentage point of interest probably wouldn’t change much behavior. But, at half a point, printers would have an incentive to spend money lying idle—ideally, by stepping up capital investment. The cost of borrowing in a negative-rate environment also would favor buying that new press or renovating the plant.

Something else that a negative rate would incentivize is paying the bills. With negative rates, you’re paying money on the money you’ll use to pay someone else. If that’s the case, you can make the negative interest the creditor’s problem instead of yours by shifting as much cash to the creditor as possible. Creditors might react by trying to limiting prepayment, but on the other hand, the accelerated income helps them by reducing their receivables—not a bad thing for cash flow.

We think that all in all, the outcome of negative interest rates for the printing and packaging industry would be neutral. What we do know, however, is that if negative rates were to appear, there would be a lot of hoarded cash to apply them to.

Companies sitting on cash—and there are many of them—should think about putting it to good use now without having to deal with the kind of pressure that a journey into this strange new economic territory would bring. If there’s positive spin to place on negative interest rates, this surely is it.