By Pater Tenebrarum at Acting Man blog
No negative rates for the putative Bancor … Keynes must surely be rotating in his grave. It turns out the IMF is not going to lend SDRs for less than nothing, thus breaking ranks with some well-known central banks out there (no need to name names), and even the central bank-manipulated “market” in which investors accept negative rates on certain government bonds as if that made any sense.
Instead, the IMF has decided to set a floor for its SDR interest rate to maintain its role as a profit center…it will be at what is nowadays a downright usurious height of 0.05%. So at least at the IMF, there will be no pretense that time preferences can actually turn negative.
There will be no funny money for nothing from me, busters!
(Photo credit: REUTERS / Fahad Shadeed)
However, the IMF is thereby effectively raising its interest rate, which until recently was at a mere 0.03%:
“The International Monetary Fund is setting a 0.05 percent floor on the interest rate used to determine borrowing costs for some of its loans.
The executive board modified rules today to make the change, according to a statement today in Washington.
The IMF’s Special Drawing Right, based on a basket of the dollar, yen, euro and pound, is the fund’s unit of account that serves as a supplemental reserve asset and was designed to improve global liquidity.
The SDR interest rate was quoted on the IMF website at 0.03 percent today compared with 0.13 percent in April and more than 3 percent in August 2008, before central banks slashed borrowing costs to zero to boost growth in the aftermath of the financial crisis.
The rate will be 0.05 percent on Oct. 27, the IMF said.
The board also approved changing the rounding convention for calculating the SDR rate to three decimal points from two, the statement said.
The SDR interest rate is used to calculate interest charged to member nations for non-concessional loans and SDR allocations, and the rate paid to members for SDR holdings. It is calculated from a weighted average of the short-term money market rates of the SDR basket currencies.
A floor will prevent the SDR rate from going negative, in the event that money market interest rates on some of the currencies in the underlying basket themselves go negative, an IMF official told reporters on condition of anonymity. The fund has no legal basis for charging a negative rate on SDRs.
(emphasis added)
So this is a precautionary measure in case the phenomenon of negative market interest rates on short term government debt instruments starts spreading further. Needless to say, we take the fact that the IMF feels it has to prepare for this eventuality as yet another sign that the whole world has essentially gone insane.
Clear signs of the spread of central bank-induced insanity – German government debt yields are negative out to two years – via BigCharts. click to enlarge.
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