Negative Interest Rates – Are There Any Positives? | naked capitalism
▻http://www.nakedcapitalism.com/2016/03/negative-interest-rates-are-there-any-positives.html
Posted on March 29, 2016 by Yves Smith
Yves here. I’m a bit mystified that central bankers were so confident that an untested experiment like negative interest rates would work out as planned, particularly since some of the assumptions as to why they thought it would work seem utterly barmy. But this is what happens when you put stock in theories that were debunked (by no less than Keynes), like the loanable funds model, that mainstream economists treat as gospel.
By Steve Worthington, Adjunct Professor, Swinburne University of Technology. Originally published at The Conversation
Negative rates have been introduced by some central banks worldwide. In theory doing so should both devalue their currency, making their exports cheaper and imports more expensive, and at the same time encourage consumer spending. It should also boost lending by financial institutions, as the value of capital being held by both individuals and banks is ever decreasing.
Sadly this theory when put into practice has been found wanting. The Bank of Japan introduced a negative interest rate of minus 0.1% in January 2016 and the yen subsequently increased in value compared to its competitor currencies. Indeed in 2016 the yen is the best performing G10 currency against the US$.
Similarly the Swiss National Bank flagged a negative interest rate of minus 0.25% to be introduced in January 2015, but the inflow of funds into the Swiss franc continued and the rate was finally reduced on its introduction to minus 0.75%, with the aim of discouraging capital inflows. However despite these moves the Swiss National Bank continued to accumulate foreign exchange reserves into the second half of 2015.
The European Central Bank (ECB) further increased its negative interest to minus 0.4%, on bank deposits held at the ECB in mid March 2016, as it attempted to manipulate downward the value of the Euro. The impact of this was undermined somewhat by allowing the European banks to borrow from their central bank at the same minus rate, depending on how much they lend to businesses and consumers. An initial dip in the value of the Euro when the minus 0.4% was announced was then followed by a sharp rise, as the implications of the whole package became clearer.
So will negative interest rates continue to be used as a weapon from the central bank armoury, or will the unpredictable behaviour of consumers and investors undermine the intentions of the central banks?
If the weapon of negative interest rates does not work as expected on currency values or domestic consumption and investment, what else is there left to deploy to prevent deflation and a further slow down in economic actively? Economics indeed truly is dismal science.
