The world's debt-laden central banks should step back from the “calamitous misadventure” of negative interest rates as a tool to combat economic downturns, according to one respected financial voice.
Whatever theoretical profit can be mined from these interest-rate gimmicks, “it is entirely overwhelmed by the slow ruin of the banking system,” explains the U.K. Telegraph’s Ambrose Evans-Pritchard.
Fed Chair Janet Yellen was grilled by lawmakers about the possibility of a U.S. recession and the tools the central bank has to combat it, including negative interest rates, during two days of recent hearings before Congress.
“Let me be clear, I think the market ructions of recent weeks are a false alarm. We are not on the cusp of a global recession, and it is a first-order fallacy to suppose that a glut of cheap oil is bad for growth,” Evans-Pritchard writes.
The Bank of Japan surprised markets Jan. 29 by adopting a negative interest-rate strategy. The move came 1 1/2 years after the European Central Bank became the first major central bank to venture below zero.
Normally, the central bank pays commercial banks an interest rate to keep their money there. (Just like when you deposit money at the bank, the bank will pay you a few pennies each year for every dollar you deposited). But in the case of negative interest rates, the money goes the other way: commercial banks pay the central bank to hold their deposits.
In other words, negative interest rates becomes a tax for holding money in an account.
But as policy makers from Tokyo to Stockholm embrace the notion, investors are close to panic mode. Far from buoying financial markets this year, negative rates have helped global stocks enter a bear market, sent the cost of protection against corporate defaults soaring and driven investors to havens such as U.S. Treasury bonds and gold.
Fueling the turmoil is fear that negative rates will slam the world’s banks. In theory, they could be the panacea to cure sluggish global growth: by charging lenders fees for parking money at central banks, policy makers hope banks will use that cash to make loans, jump-starting their economies. In practice, investors worry it may squeeze bank profits and rattle money markets.
“We’re here in an environment where central banks have to learn one message, and that is that negative interest rates are not desirable and they are not workable,” Hans Redeker, head of global foreign-exchange strategy at Morgan Stanley in London, said in a Bloomberg Television interview. “When you cut into negative interest rates you have to think about the profitability of the banking sector.”
About a quarter of the world economy is now in negative- rate territory with more than $7 trillion of government debt offering yields less than zero.
Meanwhile, Evans-Pritchard cites three opinions against negative rates as a viable option:
- Huw Van Steenis, from Morgan Stanley, calls negative rates (NIRP) a "dangerous experiment" that undermines the mechanism of quantitative easing rather than reinforcing it, and ultimately induces banks to shrink their loan books - the exact opposite of what is intended.
- "Financial markets increasingly view these experimental moves as desperate," said Scott Mather, from the giant bond fund Pimco.
- Narayana Kocherlakota, ex-head of the Minneapolis Federal Reserve, reluctantly backs NIRP as deep as -3 percent but calls it a "gigantic fiscal policy failure" that central banks must resort to such absurdities.
"Thankfully, those of us with our own currencies, central banks and fully sovereign governments always have the means to prevent the collapse of nominal GDP and to avert debt-deflation. We can run out of wit: we can never run out of monetary ammunition," he said.
"But as negative rates — in which depositors pay to hold money in bank accounts — become a more common fixture, there are many unknowns about what these policies mean for finance, for the economy and even for the definition of money."
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