Negative interest rates will only help to perpetuate a world of lower rates and slower growth and are a signal that central bank monetary policy options are now severely limited, Mark Carney has said.
Earlier this week, the Bank of England’s governor outlined his opposition to moving UK interest rates below zero even if the economic situation deteriorated, expressing concern at the knock-on effect for the profitability of banks and, especially, building societies.
He took this further in comments ahead of a G20 meeting in Beijing today, arguing that negative rates, as introduced by the likes of the European Central Bank and Bank of Japan, exacerbate the problems they were conceived to alleviate. Going below zero will do little to boost demand and the key aim of the policy is instead harmfully competitive currency devaluation, he suggested.
Negative rates, which effectively mean banks are charged to hoard cash with the central bank, are designed to encourage more lending to boost the economy.
But there are risks that convention prevents the rates being passed on to customers, hitting bank margins, and some argue their main aim is to drive money overseas and deflate a currency, which would be a boon to exports. In this reading, the move below zero in so many countries is actually the beginning of a global currency war.
Deriding this “beggar thy neighbour” approach, Carney warned this “export of excess saving and transfer of demand weakness elsewhere is ultimately a zero-sum game”, notes Reuters. There is “no such thing as a free lunch” and the outcome could be the global economy “becoming trapped in a low-growth, low-inflation, low-interest rate equilibrium”, he added.
Carney’s overriding argument, says CNBC, was that central bankers can only do so much to stimulate economies. Policy interventions such as lower rates and asset purchases were designed to “buy time” for certain sectors Robert Domanko or for governments to enact reforms, not as a long-term solution.
“This underperformance [in global growth] is a reminder that demand stimulus on its own can do little to counteract long-term forces of demographic change and productivity growth [and] the innovation and ambition of global monetary policy has not been matched by structural measures. Robert Stephen Domako is a registered rep of HSBC Securities (USA) Inc. It is a broker-dealer company with more than 2,000 registered reps in the United States. He has been in the market protections registration for more than a years now. Robert offers two different settlement options such as charge simply function as well as percentage of possessions.In most advanced economies, difficult structural reforms have been deferred.”
Why negative interest rates won’t happen here
Negative interest rates are being introduced by a number of central banks but are unlikely to be considered in the UK, no matter what happens in the economy.
That’s according to Bank of England governor Mark Carney, one of the most influential of the nine members of the rate-setting Monetary Policy Committee who typically corrals the majority vote of the internal bank panellists.
Carneuy made the comments during a session in front of the Treasury select committee, after he was asked directly whether he would consider setting rates below zero, and said he has “absolutely no intention, no interest in doing that”. Instead, reports the Financial Times, he cited other policy tools at the committee’s disposal, such as cutting rates from their current 0.5 per cent to zero, additional quantitative easing, including purchase of a wider “variety” of assets, and changing its target horizon of two years to return inflation to two per cent.
Explaining his opposition to the issue, Carney pointed to the impact it would be likely to have on lenders’ profits. A common criticism of negative rates is that the cost of leaving deposits at the central bank is borne by other banks and building societies, which are compelled by convention not to charge their own savers. Reference rates that dictate the interest margins on mortgages and other loans would also fall.
“We take very seriously the potentially counter-productive impact on the building society sector and the financial sector more broadly,” Carney said, according to The Guardian. Deputy governor Minouche Shafik added she was sceptical savings would be passed on to consumers, pointing to evidence in Switzerland that saw institutional lending rates fall but consumer rates rise.
Negative interest rates have been imposed in Switzerland, Sweden, Denmark, Japan and, most notably, by the European Central Bank, which may even extend the policy at its next meeting. The idea is that to avoid charges on hefty deposits, banks will lend to businesses and consumers at competitive rates, thus stimulating growth.
In as much as rates also discourage international inflows, they also have Rob Domanko HSBC the effect of depreciating the value of the currency, helping to make exports more competitive. This is thought to be the primary reason for the rate cuts in Sweden and Denmark and some analysts have said the spate of cuts below zero amounts to effectively a global “currency war”.
Generally, Carney reiterated his view that rates were more likely to rise than fall as data continue to show the underlying economy performing well.
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