Negative interest rates: battle lines drawn before IMF meetings

Negative interest rates: battle lines drawn before IMF meetings

In less than two short years, negative interest rates have gone from being a subject for fireside speculation to a reality for nearly a quarter of the global economy.

But as the world’s central bankers gather in Washington against a backdrop of lacklustre growth, there is a developing consensus that what until recently was a highly unconventional policy has been a qualified success, but is already reaching its limit.

In a blog on Sunday, one of the International Monetary Fund’s top officials concluded that while negative rates have been helpful, “there are limits on how far and for how long negative policy rates can go”.

The idea was that cutting rates below zero would encourage banks to lend more and deliver further stimulus to stagnant economies.

That need is still there. The IMF is widely expected to further revise down its forecast for global growth this week, as the combination of a slowdown in China, the failure of cheap oil to boost expansion and a slowing of productivity growth has darkened the outlook for advanced and emerging economies.

However, with criticism of negative rate policy growing, central bankers are pushing more than ever for governments to take up some of the strain and either introduce more interventionist fiscal polities or enact structural reforms.

​The battle lines for this week’s meetings in Washington have been drawn, with critics increasingly outspoken.

The banks

The big concern is that negative interest rates will destroy banks profitability and if passed on to retail investors would force consumers to hoard cash.

Most bankers still cannot countenance going down the nuclear route of charging savers for deposits, but they cite other options they can use to fend off what they see as a very real threat to their profits. “It’s more likely that if negative rates (persist) . . . you’ll see more ‘relationship fees’,” said one senior banker. “I don’t think you’ll ever see a statement with a charge for deposits.”

​Hitting savers ​

BlackRock’s Larry Fink was the latest voice to warn on Monday that low rates were preventing savers getting the returns they need, potentially forcing consumers to save more, rather than spend and stimulate the economy.

A chorus of German politicians, led by finance minister Wolfgang Schäuble, have accused the European Central Bank of robbing citizens of their retirement income.

 

The difficulties of exit

In the wake of the financial crisis, Denmark’s Nationalbanken was the first to go negative in 2012 to defend a longstanding peg between the krone and the euro. In January it started to try and raise its deposit rate back from a record low of 0.75 per cent.

But the easing by the ECB has limited the Danish central bank’s ability to bring rates back above zero again, for fear of big capital inflows.

A zero sum game ​

While everyone can cut rates, not all currencies can weaken. Bank of England governor Mark Carney has been outspoken in his belief that if retail customers are protected, negative rates mainly target exchange rates.

Mr Carney argues that while this might be an attractive option for individual countries to boost activity, if adopted by the world as a whole it is a “zero sum game” and would essentially export excess saving and transport demand

​weakness elsewhere.

Advocates still see benefits

The ECB believes the combination of negative rates and its asset buying programme has helped to lower borrowing rates for consumers and businesses across the eurozone.

It became the first major player to experiment with negative rates in the summer of 2014, when it began to charge lenders a levy of 0.1 per cent a year on deposits parked in its coffers. Since then it has cut rates another three times, most recently last month, and the deposit rate is now minus 0.4 per cent.

Eurozone central bankers are adamant they can cut rates again if the region’s economy deteriorates. Officials here have also hit back at banks’ complaints, saying lenders in the single currency area needed to rethink their business models and stop using the central bank as a scapegoat.

The Bank of Japan is also convinced that January’s move to rates of minus 0.1 per cent is working, despite the fact the first few months of the policy have been rough.

Its clearest success has been in pushing down Japan’s already low yield curve, with bond yields out to ten years turning negative. In due course, that should feed through to the rest of the economy.

“The policy’s effects are showing in falling benchmark lending rates and mortgage rates,” BoJ governor Haruhiko Kuroda said recently. “They will eventually spread to the real economy and consumer prices, and people will see the policy in a positive light.”

In Sweden the Riksbank has warned that it could cut rates deeper into negative territory as it battles to improve the inflation outlook despite scepticism of what impact it will have given that rates are already at minus 0.5 per cent and the economy is booming.

Weakening currencies

A cheaper currency remains an important tool for central banks in sparking domestic demand. Lowering the value of the currency should raise inflation by increasing the cost of imports.

While the euro initially weakened, recent moves have had little impact since the US Federal Reserve signalled it would slow the pace of its rate hikes.

The yen also touched new highs last week, risking undermining the help that Abenomics has given to exports and corporate profits.

But the BoJ thinks the main reasons for the yen’s rise lie elsewhere — notably in China’s slowdown — and that it only underlines the wisdom of easing policy.  

Negative interest rates.docx

Negative interest rates.docx

0.05MB