Are negative rates the new normal?

April 19, 2016 12:16 am | Updated November 17, 2021 03:10 am IST

If it is hard to agree on strategies that are critical for global growth, then at least avoid the ones that could hurt progress. This seems like a reasonable reading of the deliberations at the Spring Meetings of the World Bank and the International Monetary Fund last week. Clearly, the earlier impatience to see a return to the robust rates of growth that preceded the 2008 meltdown is gradually giving way to a more sober acceptance of a modest medium-term recovery. > China’s slowest rise in GDP since early 2009, low global commodity prices, and the uncertainty over > Britain’s continued membership of the European Union , together seem to contribute to a more cautious stance. Scepticism over excessive reliance on monetary tools, especially in the backdrop of the prolonged low interest rates in the eurozone, is not unfamiliar in these forums. But U.S. Treasury Secretary Jacob Lew was in line with the majority when he spoke uneasily about the pursuit of negative nominal interest rates, currently being adopted by six central banks and 25 per cent of the world economy. The explicit opposition to negative rates could partly be explained by the exceptional and experimental nature of this particular measure — rates of zero per cent and below have been a rarity until very recently. Proponents see negative rates as a means to induce consumers to spend more and banks to lend more, with the potential to spur growth and raise inflation expectations.

The implications of low or negative returns for individual savings, however, could be mixed. Customers would either have to save more to meet long-term targets or hold cash to avoid its adverse effects, assuming that banks brave themselves to pass on the burden. The > negative rates policy has thus come under considerable attack both in Germany and Japan, despite the macroeconomic objectives they were designed to realise. A more serious objection, in view of the sizeable ageing populations in these societies, is the impact on the viability of pensions, life insurance and savings vehicles. German Finance Minister Wolfgang Schäuble has gone so far as to blame the rise of populist anti-EU parties for the European Central Bank’s negative rates policy, dubbed “penalty rates” in his country. Growing public anger is also said to limit any room for manoeuvre for further rate cuts by Japan. Curiously, within two months of the hike in the U.S. in the rate of lending last December, the chair of the Federal Reserve did not rule out a plunge into negative territory. While emphasising the potential to create additional stimulus in the economy and maintain price stability, the IMF is tentative about how long governments may persist with negative rates. Meeting in Shanghai earlier this year, the Group of 20 countries agreed to refrain from a competitive devaluation of currencies. It may not be long before negative rates policies, which in effect weaken currencies, are pushed up the agenda for concerted action.

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