Wednesday 28 September 2016

Negative campaigning - the last throw of the dice for world's central banks

Simon Kennedy

Published 30/01/2016 | 02:30

Haruhiko Kuroda, governor of the Bank of Japan, looks down at his notes during a news conference. Photo: Bloomberg
Haruhiko Kuroda, governor of the Bank of Japan, looks down at his notes during a news conference. Photo: Bloomberg

Central banks are turning even more positive about negative interest rates.

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The Bank of Japan yesterday joined a growing club taking the once-anathema step of pushing some borrowing costs beneath zero.

The policy's purpose is to make it less attractive for banks to hold cash, forcing them to pass on cheap borrowing costs and loans to companies and consumers.

It also tends to weaken currencies, making exports more competitive, albeit at the risk of provoking retaliation from trade partners.

With about a quarter of the world economy now in negative-rate territory, the policy reflects pressure to do even more to ignite inflation at the risk of hurting banks.

The lack of fallout so far sets the stage for the European Central Bank to cut rates even more and may fan speculation the Federal Reserve will follow if the US slumps.

"Negative rates are now very much the new normal," said Gabriel Stein, an economist at Oxford Economics in London. "We've seen they are possible and we're going to see more."

Japan's adoption of a negative rate as part of a three-tier system makes it the latest central bank to twist toward even more stimulus after 2016 began with the outlook for global growth deteriorating anew. With equities falling, commodities sliding and China slowing, the ECB is signalling fresh aid for March and the Fed this week reduced the likelihood it will raise rates that month.

"This should add speculation that the Fed can do less and the ECB will need to do more," said Christoph Rieger, head of fixed-income research at Commerzbank in Frankfurt.

Economists once considered zero as low as central banks could go. Negative rates became more conventional the longer inflation stayed weak worldwide following the 2009 recession, despite central banks slashing their benchmarks and buying bonds.

Sweden, a pioneer back in 2009, Denmark and Switzerland all now have the minus sign before some of their rates and the ECB charges banks 0.3pc to hold deposits in its coffers overnight.

The downside is that banks are pinched, so the policy could backfire if they retrench.

"For the banks, this is generally bad news as regards their profitability - with long-term interest rates still lower than before and so margins are squeezed," said Brendan Brown, head of economic research at Mitsubishi UFJ Securities in London.

The welcome news is that there has been limited fallout in the Scandinavian economies that first went sub-zero. They have mostly avoided banks pushing the cost on to borrowers or hunkering down to protect profits.

"It has some complexities for the banking system, but the lessons from Denmark, Sweden and Switzerland is that it also has an economic effect" said Kristoffer Kjaer Lomholt, an analyst at Danske Bank.

The revolution may be here to stay. Negative rates once "sounded illogical", said Stein. "We now know what we thought was true isn't." (Bloomberg)

Irish Independent

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