Efficacy of negative rates questionable

Haruhiko Kurodaand and Mario Draghi may be among the few economists who still think negative interest rates are a good idea.

The Bank of Japan governor’s decision last month to charge banks on some excess reserves, a year and a half after his counterpart at the ECB took a similar path, means that a quarter of the world economy is now in the sub-zero club.

Yet just 27% of respondents in a survey say negative rates will help Mr Kuroda reach his goal of boosting feeble inflation, and only 42% say the policy is succeeding in the eurozone.

While the strategy has shown it can weaken currencies — one channel for spurring consumer prices — the discussion over how long that can last and the likelihood of unintended consequences is getting louder.

“Since more and more central banks are applying negative rates, this instrument is becoming less effective,” said Kristian Toedtmann, senior economist at DekaBank in Frankfurt. “All these currencies can’t devalue at the same time.

"The result may be an excessive use of negative rates with harmful side effects.”

What started in 2012 as a consequence of Denmark’s fight to defend its currency peg to the euro has now become a mainstream policy pillar, mulled even by the US Federal Reserve.

The survey of 63 economists shows that while some say negative rates helped avert even worse downturns, the strategy is only really appropriate for small economies shielding themselves against speculative capital flows.

Ninety percent of respondents said the Danish Nationalbank is on the right track and 70% approved of the Swiss National Bank’s use of the measure. Both are protecting their currencies.

Less convincing was Sweden’s Riksbank, which lowered the repossession rate to minus 0.5% last week to bolster inflation, and which had the support of 41% of economists.

Even so, the scepticism doesn’t seem to be deterring monetary officials in Tokyo, Frankfurt or Stockholm.

In the eurozone, overnight index swaps show that investors expect the deposit rate, now at minus 0.3%, to fall a further 20 basis points by mid year. Mr Draghi has indicated the next step could come in March.

In Japan, Mr Kuroda told parliament yesterday that negative rates will help boost the economy by stimulating investment in capital and housing.

The Riksbank said last week that it has the scope to reduce rates further, though economists in the survey said it has probably reached the floor.

Eurozone inflation was 0.4% in January and the ECB says it may turn negative in the coming months. Japanese consumer prices probably stagnated last month. Sweden’s rate was 0.8%.

The central banks for all those economies have inflation goals of about 2%.

The standard central-banker defence to criticism of apparently inert stimulus is the counterfactual — things would have been even worse without it.

That’s a sentiment echoed by some respondents in the survey.

The ECB’s policy “has prevented a larger decline in inflation and has helped to push lending rates to the economy lower,” said Philippe Gudin, chief European economist at Barclays.

When it comes to actually boosting inflation, not to mention wages and economic growth, negative rates can’t do much and they distort foreign-exchange markets, according to Elwin de Groot, an economist at Rabobank in Utrecht, the Netherlands.

In a sign currency traders have started to rebuff the ECB and the Bank of Japan’s easing efforts, the euro and yen have risen against the dollar this year.

ECB policymakers acknowledged the issue at its meeting last month in Frankfurt.

An account of the session published on Thursday stated that while the exchange rate’s role in transmitting monetary policy is still important, the channel has weakened.

“Negative rates may have started to backfire. For small central banks, negative rates can be an effective tool to steer their currencies.

"When major central banks cut rates further into negative territory, they raise the global currency war to a higher level” said Mr de Groot.

Negative interest rates - who will pay for the experiment? https://t.co/t1QcspWvbh (free to read) pic.twitter.com/fmUhcCaV00

— Financial Times (@FT) February 19, 2016