The world’s tentative experiment with negative interest rates got off to an unremarkable start.
Sweden’s Riksbank – the world’s oldest central bank – became the first major monetary authority to cross the rubicon and take its main policy rate into the red exactly a year ago to the month.
The Riksbank’s move followed the likes of Switzerland and Denmark, who had turned negative in a bid to stimulate flagging inflation and halt the punishing appreciation of their currencies.
But sub-zero rates did not cause immediate panic in financial markets that central bankers were “losing control”.
Neither did they seem to produce any deleterious economic effects in their host countries, as savers continued to keep their money deposited in banks rather than fleeing for the safety of cash. Commercial lenders, meanwhile, adjusted their business models to help maintain profitability.
In September, Andy Haldane, chief economist at the Bank of England, joined a chorus of influential thinkers when he posited that negative rates could be necessary to protect the UK and the other advanced economies from the next global recession.
The “new abnormal”
But recessionary fears have crept up on the world much faster than the likes of Mr Haldane may have anticipated at the end of last year.
Global markets have crashed into bear market territory. A cocktail of fears over the collapsing price of oil, the creaking health of the world’s biggest banks and China’s competence in managing its economic slowdown, has sparked fears that investor panic may lead the world into a new downturn.
Bank shares have been in the eye of the selling storm and have concentrated minds on just what negative interest rates mean for the financial system.
These jitters were set off by the Bank of Japan’s shock decision to join the negative rate club at the end of January. For the first time in the negative rates experiment, it seemed monetary authorities were getting desperate in their attempts to stimulate growth and inflation with their limited policy tools (see map above).
Like its counterparts in northern Europe, Japan’s sub-zero rates were intended to drive down the value of its currency, the yen. It didn’t work.
The yen has now risen by 10pc against the US dollar since the Bank of Japan’s negative interest rate decision on January 30.
Sweden soon followed suit in the competitive devaluation cycle, slashing its already negative repo rate to -0.5pc to stimulate inflation and cap the rising value of the krona.
With the ECB expected to head further into negative territory next month, the world has entered a “new abnormal” of negative rates, says Scott Mather at Pimco.
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