European Central Bank, Frankfurt © Getty

Stashing cash in secret vaults is the sort of activity usually associated with criminals. Now Swiss pension funds are considering getting in on the act. The reason is that they are fed up with having to pay banks simply to park their money in regular accounts and are considering making mass withdrawals, according to ASIP, a trade body.

Welcome to the Alice in Wonderland world of negative interest rates, a topsy-turvy universe where central bankers are so alarmed at the prospect of weak inflation that they have cut borrowing costs below zero, in effect charging financial institutions to leave their accounts in the black.

Policy makers hope that the charges will push banks to lend more to households and businesses, where margins remain quite high.

Lending to businesses rose in the eurozone for the first time in three years in March.

But negative interest rates could also exacerbate the threat that banks and other investors create bubbles by buying riskier assets as they search for some yield.

“Very low rates may push agents in the financial markets to take on excessive risk,” said Silvia Merler, an affiliate fellow at Bruegel, a Brussels-based think-tank. “It is very important that the supervisory architecture in the eurozone is now significantly stronger and that supervisors are a lot more focused on financial stability.”

The European Central Bank last June became the first major central bank to head down the rabbit hole and now imposes a levy of 0.2 per cent a year on deposits that eurozone banks park in its coffers. In Sweden, the Riksbank now pays banks 0.25 per cent in interest a year to borrow from it.

The Swiss National Bank, which levies 0.75 per cent on bank deposits, seems to have cut its rate so low that it is now perhaps nearing the mysterious concept known by economic policy makers as the zero lower bound.

At this level, depositors such as pension funds will try withdraw cash and vault it. In economies such as Switzerland and the eurozone, where the highest denomination notes are SFr1,000 and €500, storing cash carries smaller costs than it would in the US or the UK, where denominations are lower.

“It’s clear Swiss pension funds are being affected by negative rates,” said Hanspeter Konrad, director of ASIP. “It’s unfortunate that we are so limited in what we can do to compensate for this.”

The ultimate aim of this voyage into the unknown is to lift inflation towards central banks’ targets of about 2 per cent by flooding the economy with cheap cash, which would then feed through into economic activity and prices.

The idea of being paid to borrow — or charged to save — is spooky to most people. But economists have dealt with the concept of negative rates for years.

Nominal rates below zero are a rarity. But negative real interest rates were a feature of the early stages of the global financial crisis.

When inflation touched 5.2 per cent in the UK in autumn 2011, the Bank of England had already cut rates to 0.5 per cent. With inflation in the eurozone now hovering around zero, real interest rates are much higher now despite the ECB’s foray into negative territory.

Yet the strangeness of the idea has meant that, in much of the eurozone at least, it has not really caught on. What economists describe as the “money illusion”, or the tendency of people to think in nominal terms, has left lenders fearful of passing the rates on to their customers. In turn, central bankers hope that low inflation does not become so entrenched that the public becomes more willing to accept charges on their savings.

Some banks in Germany, including Commerzbank and HSBC, have started to charge some depositors to save in some currencies, while stories of Nordic sex therapists being paid to borrow have made headlines. But this is relatively rare.

“The big issue is that banks aren’t able, at least for now, to pass on the negative rates to their customers,” said Dirk Schumacher, economist at Goldman Sachs. “The banking sector has largely had to bear the cost, with a few exceptions.”

The SNB expects to charge banks SFr1.2bn for their deposits held at the central bank. But banks’ resistance to pass on the charges to customers has constrained the impact of negative rates.

Nevertheless, the policy’s shock value has offered some advantages.

It is impossible to disentangle the impact of the ECB’s move below zero from the effect of other measures, such as policy makers’ landmark €1.1tn quantitative easing package. But the sheer weirdness of negative rates is viewed as a factor in the euro’s fall against the dollar. Before negative rates were introduced, the single currency was just under $1.40. Today it is under $1.10, a big boost to competitiveness.

“Negative rates may well have had an impact on the exchange rate,” said Mr Schumacher. “It’s the psychology of them: that you have to pay money to hold euro liquidity.”

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