For several years now, regardless of what sort of economic challenges appeared, financial markets have enjoyed the safety net of central bankers coming to the rescue.
What are negative interest rates and how do they affect consumers?
Clearly the severity of the deterioration in sentiment since the start of this year – a 15 per cent decline in eurozone stocks, a 55 basis point fall in the 10-year Treasury yield and rising bets of a U.S. recession this year – is disproportionate to the catalysts for the sell-off – all of which were firmly in place well before the beginning of 2016. Yet when, earlier this month, the Bank of Japan announced it was joining the so-called NIRP club, market turmoil ensued. At some point, the cost of holding cash in a bank account would become prohibitive: savers would eventually rediscover the virtues of stuffed mattresses (or buying equities, or housing, or anything with less of a negative rate).
“The risks to our forecasts are to the downside: we could reach lower levels in USDJPY much more rapidly if risk aversion continues to build, and the risks of a much lower endpoint by year-end also are high”, they added. That didn’t escape Fed Chairwoman Janet Yellen either, who at a congressional testimony this week signaled further rate hikes could be postponed if the global jitters hurt the US economy. The imports prices have fallen by 24% since 2014 which can be largely attributed to falling oil prices. From Washington, D.C.to London to Frankfurt to Tokyo, interest rates have either approached or dipped under the zero bound, while at the same time central banks have engaged in varied and often politically contentious ways of increasing the money supply of their respective economies-all in the hopes of resuscitating growth.
Central banks globally have been stimulating growth through currency devaluations and unprecedented cuts in interest rates, however, growth remains sluggish at best. On Thursday, the Riksbank went even further, lowering its main interest rate to -0.5 percent from -0.35 percent. The ECB now has a negative 0.3 percent rate, meaning that when banks deposit money at the central bank overnight, they pay for the privilege. The Japanese currency and gold are usually the assets of choices when investors dump risky assets such as stocks and energy. But it is an assumption that is increasingly being tossed aside by some of the world’s central banks and bond markets.
But the rates’ lower limits are far below what many have assumed, the JP Morgan report concludes, suggesting banks could absorb the extra hit more easily than feared.
The bear market reared its head this week, mauling local shares and signalling that the market jitters of the past ten months have escalated into deep concerns about the state of the global economy. Since that move, the Japanese Yen has actually strengthened against the USA dollar.
The BOJ unexpectedly cut a benchmark interest rate below zero on January 29, a bold move that stunned investors and that was meant to stimulate the economy and overcome deflation amid volatile markets. They would not be forced to resort to quantitative easing or “helicopter money”.
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White argues for a humble and fundamental re-think of the wisdom of easy money policies that seem to encourage the accretion of debt and the rise of asset prices.
