European banks are offering negative mortgage rates. Below zero
The phenomenon of negative interest rates is a modern trend that began in 2008. As a result of the financial crisis that broke out in the United States, the growth rate of leading economies slowed down, unemployment rose, and consumption declined. Central banks were forced to reduce interest rates in order to minimize the negative impact of these trends on the population and business. As a result, the discount rates of leading central banks were reduced to record lows:
The credit resource became more accessible, however, the policy of “cheap money” did not have the desired impact on macroeconomic statistics. This was largely due to the fact that the presenters. The United States was the quickest to recognize this fact and react to it – in 2008 it launched an economic stimulus program called “quantitative easing” or QE.
The speed of decision-making predetermined the vector of further developments. Key US macroeconomic indicators have recovered to pre-crisis levels over several years, while their European counterparts remain less attractive even 6 years after the start of the crisis. A striking example is unemployment (the moments of the launch and completion of the US economic stimulus program are highlighted):
Despite low rates, the problem of European economic recovery remained, and when the threat of deflation was added to it, . The regulator carried out regular verbal interventions; in September 2014, a negative deposit rate was introduced, and in 2015, a rate similar to the American QE.
Negative rates in the Eurozone
The ECB's negative deposit rate does not have a direct impact on household savings in commercial banks, since it only applies to certain commercial bank accounts with the Central Bank. The key goal of introducing this measure is to restore the lost rates of economic growth and return inflation to the target level of 2%. With the help of an ultra-soft monetary policy, the Central Bank seeks to increase the rate of lending to the population. Currently, the level of household spending in the Eurozone is below pre-crisis levels:
“Cheap money” should stimulate consumption; if this indicator grows, retail sales will increase, and businesses will be more willing to expand and, as a result, create new jobs. In addition, negative ECB deposit rates should encourage banks to increase the pace of lending to the real sector of the economy.
Negative yield?
The discount rate of the Central Bank of Switzerland and Denmark is at minus 0.75%, in Sweden – minus 0.1%. The logic of the central banks of these countries is similar to the logic of the ECB. At the same time, despite the fact that deposit rates for the population are not negative, the yield of individual debt securities was already negative. A similar situation was observed in the market for government debt securities in Denmark, Sweden, Switzerland and Germany and was caused by increased demand.
This demand can be divided into speculative purchases in anticipation of the full implementation of the QE program; acquisitions by banks, which, in the context of negative ECB rates, consider it more rational to place reserves in high-quality debt securities; purchases of large institutional participants using a passive asset management strategy (for example, pension funds).
As the QE program increases, the ECB will buy more and more European debt securities, as a result of which both the yield on bonds of problem countries and the yield on debt securities of economies that are quite solvent will decrease. QE was launched relatively recently, and I think that in the future we can expect a continuation of the downward trend in yields on European government and corporate debt securities.
Declining yields coupled with low lending rates will most likely contribute to a shift in the interest of certain groups of investors and an increase in the volume of investments in the European stock market. Leading European stock indices have remained attractive since the announcement of the European QE program in October 2014 and are likely to remain so for a long time to come.
The EURUSD pair is declining due to a stable combination of the ECB's ultra-loose monetary policy and expectations of an upcoming rate hike from the US Federal Reserve. Long-term trend, the immediate goal is parity.
The effectiveness of negative rates
It will be extremely difficult to assess the impact of negative rates on the economy separately from other methods of stimulation, since this is a set of measures that are applied simultaneously and have a cumulative impact on macroeconomic statistics; in addition, the effect of their implementation will most likely appear with a significant time lag.
The growing popularity of ultra-loose monetary policy among leading central banks provokes a depreciation of the national currencies of countries involved in such a currency race. Business conditions are becoming increasingly attractive for exporters, while importers suffer as foreign goods become more expensive due to exchange rate differences.
The ultra-soft policies of individual countries lead to suppression of the exports of their trading partners if they do not take similar measures and the exchange rate of their national currency does not decline. In other words, the introduction of aggressive measures to stimulate the economy by the central banks of leading economies may provoke a deterioration in the macroeconomic indicators of their trading partners and, as a result, contribute to the introduction of similar monetary policies by the latter.
According to statistics, the EU's key importers are China (16.6%), Russia (12.3%), the USA (11.7%) and Switzerland (5.6%). The fall of the euro will primarily affect the volume of imports from China, the USA, and Switzerland, since the national currencies of these countries are strengthening or do not show a decline comparable to that observed in the European currency market. In my opinion, the era of negative rates will last at least 1.5 years, and the key indicator of its end is the state of the Eurozone economy.
More detailed information about the reasons for the decline of the EURUSD pair and the prospects for the US and EU economies and in the form.
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On June 5, 2014, the European Central Bank announced at about 14.45 Latvian time that it was reducing all interest rates, including the deposit rate was reduced from 0% to a negative value of -0.10%. Such information caused a stir and even panic among non-specialists in financial markets. What does this interest rate mean and how does it relate to economic entities, i.e. to residents and non-banking businesses of Europe, including Latvia, without delving into the subtleties and complexities of regulating macroeconomic processes and the money supply?
The deposit interest rate, which is regulated by the ECB, refers to the interest rate on deposits that commercial banks create in the accounts of the central bank. Yes, commercial banks can not only borrow from a central bank, but also deposit excess funds with the same central bank. The higher the interest rate on deposits for commercial banks, the more interested the commercial bank will be in holding funds with the central bank. Why does a commercial bank put its funds on deposit and not lend to households and businesses? In a market economy, no one can force commercial banks to lend to households and businesses. The Central Bank can create comfortable conditions for commercial banks to lend to the population and businesses through the resale of loans taken from the Central Bank (naturally at a different price). If the risks are too high, then regardless of the central bank's policy, commercial banks will not lend to the economy. For example, experts in the United States note that the ultra-soft monetary policy of the US Federal Reserve is used by commercial banks not to lend to the economy, but to pump up speculative bubbles in financial markets. Another example is that now in Latvia commercial banks are very careful in lending, but back in 2006-2008 loans were distributed left and right. Therefore, until June, commercial banks could safely hold available funds on deposits with the central bank, receiving a small profit just above zero without any risks.
How to stimulate lending to the economy by commercial banks? One of the unconventional possibilities mentioned by the head of the ECB is the continuation of lowering deposit rates for commercial banks to negative values. This means that with negative deposit rates, a commercial bank will lose part of its money - currently at the rate of 0.1% per annum. For example, if a bank deposits 100 million euros for a year, then after a year the central bank will return 100 thousand euros less. Since a commercial bank is not interested in losing money so easily, it will be forced to withdraw its funds from the central bank. From the ECB's point of view, this should encourage commercial banks to do something with these funds, for example, start lending to households and businesses. It is naive to believe that all commercial banks will rush to lend en masse given such high risks of insolvency of the population, economic instability, etc. A commercial bank can hold excess money for a while (especially since the inflation rate in the eurozone is extremely low) and can sell the excess money to another commercial bank at a rate of EURIBOR plus minus, can issue a loan in another country if there is a network of branches abroad, etc.
How will a negative deposit rate affect the deposit rate for households and businesses in Europe and Latvia as well? In today's conditions, in principle, no way. The supply of commercial banks, although influenced by the policy of the central bank, is still independent. A commercial bank will never make negative deposit interest rates for households and businesses, because this will cause a massive outflow of deposits from the bank (who wants to lose money?), which will provoke, if not bankruptcy, then serious problems for the bank, especially if this bank has no more strong support from the parent bank. Any commercial bank is interested in attracting money from the public for subsequent investment in securities or resale of this money in the form of a loan to other interested parties. The rate on deposits for the population depends on many factors (competition among banks, inflation in the eurozone, the demand of commercial banks for liquidity, the amount of effective demand for loans, etc.) and not primarily on the rates on deposits for commercial banks. Very often, the deposit rate for households and businesses is at a level slightly higher or lower than inflation. Currently, deposit interest rates are already at very low levels. According to statistics Latvijas Banka The average rate on deposits in euros is about 0.39%, with annual inflation in the eurozone about 0.49% (for the month of May). The figure below shows the dynamics of the deposit interest rate for households and businesses in the European Union, as well as the dynamics of the ECB deposit rate for banks and the inflation rate over the past 14 years. As can be seen in the figure, the difference between deposit rates for households and banks is about 1.5-2%.
Source: ECB, EuroStat
Dynamics of the average deposit rate for households and businesses, the ECB deposit rate for banks and the inflation rate in the EU for the period from 1999 to 2014, %
Therefore, a negative rate on deposits for commercial banks can be noted by any resident of Europe, including Latvia, only as an amusing fact that does not mean anything. If we talk about deposit rates for individuals and businesses in terms of the level of profitability, then the deposit has never been and will not be a good source of increasing capital.
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The head of the world's largest investment firm, BlackRock, called for attention to the dangers of cutting interest rates, which often turn negative, a policy that some central banks have resorted to to support the economic situation. Larry Fink, co-owner and chief executive officer of BlackRock, noted in his annual address to shareholders that low interest rates are also hurting savers, which in turn could mean the policy is having the opposite effect on the economy than expected.
He sees negative interest rates as "particularly worrying" and potentially counterproductive amid social and political risks. This has created the most volatile situation in the global economy in about the last 10 years, MarketWatch reports. “Their [central bankers’] actions are putting severe pressure on global savings and creating incentives for them to seek higher yields, pushing investors toward less liquid assets and higher levels of risk, with potentially dangerous financial and economic consequences,” Fink wrote to shareholders.
Savers are forced to put more money into investments to meet their retirement goals, which means they will spend less on their own consumer spending. These and a number of other factors, including geopolitical instability, are creating “a high degree of uncertainty in the global economy that is not has been observed since pre-crisis times." “Monetary policy is designed to support economic growth, but now, in fact, it causes risks of a reduction in consumer spending,” the German financier concluded.
The IMF is in favor, but...
Meanwhile, the International Monetary Fund also shared its own thoughts on negative interest rates. Its experts said that "overall, they help provide additional monetary stimulus and financial conditions that support demand and price stability." The IMF believes these rates could encourage the private sector to spend more, although it acknowledges that savers could be hit.
The IMF does acknowledge that there is a "limit to how far and how long" negative interest rates can go. Such a policy could cause “unpredictable consequences”: for example, banks will begin to lend to risky borrowers in an attempt to compensate for the decline in the number of depositors. Negative interest rates can also trigger boom-bust cycles in asset prices, the IMF notes.
Extraordinary measure
The logic behind introducing negative rates is very simple, says Robert Novak, senior analyst at MFX Broker. In conditions where the rates at which commercial banks can place money on deposit with the Central Bank are positive, and the economic prospects are uncertain, banks often prefer not to lend to households and businesses, but to earn money without risk by simply placing money with the Central Bank.
When rates become negative, it becomes unprofitable to keep money in the Central Bank: in order to earn money, banks are forced to engage in active lending - it is better to lend money even at a minimal interest rate and receive at least some income than to obviously lose when placing it on a deposit with a negative rate. Thus, by introducing negative rates, regulators are trying to force banks to lend more actively, and to issue loans at a minimum interest rate. In the future, this policy of “cheap loans” should have a stimulating effect on the economy.
Yes, says Robert Novak, Lawrence Fink's comments about the possible negative consequences of negative interest rates are correct. But these negative consequences are unlikely to materialize if the period of negative rates is short-lived. Still, the world's central banks consider this measure as extraordinary and do not intend to delay its application. So this policy is unlikely to lead to any serious problems.
The new chapter of the world economy
Zero or negative rates are the same as the new head of the world economy, says Alor Broker analyst Alexey Antonov. After the 2008 crisis, the United States and the eurozone did this in order to stimulate economic recovery, but they did not think about the consequences and the proper effectiveness. And, as we have seen from history, it was in vain - because the expected result did not happen. While the United States is gradually recovering, growth in the eurozone is almost zero.
Over long periods, the model is disastrous for developed economies, and it seems, the expert says, that the American regulator understands this after all, since it is already thinking about raising the rate. Now they are faced with a serious question - to raise the rate, despite the global risks from China and cheap oil, or to balance at the current zero rates and wait for economic growth, and only then raise it.
Objectively, Antonov believes, now the Fed has no effective measures left to maintain the economic balance, and, perhaps, in the event of a crisis, the story of launching the printing press may repeat itself. That is, in other words, it is less stressful for the economy not to raise the rate, but this will only have an effect for some time, until the next time the machine is connected to the business - this will not solve the global problem. An increase in it, which after a while would somewhat sober up the economy, would solve the problem. But here again the question, says the expert, is whose interests does the government adhere to? Objectively, he now needs public peace and business support, so, probably, the saga with retention will continue.
We're not going there
As for the Russian Federation, then, of course, the introduction of negative rates by the Bank of Russia is out of the question, Robert Novak is sure. This measure is introduced by central banks only when there is a real threat of deflation that cannot be prevented by any other measures. In Russia, on the contrary, there is inflation that is almost twice the target level of 4%. In such cases, in world practice, not negative, but, on the contrary, increased rates are used. Which, in fact, is what the Bank of Russia did.
Nevertheless, according to Robert Novak, Russia can derive some benefit from the negative interest rates involved in Europe and Japan. Rates on Russian bonds (both government and corporate) look very attractive, and, as Bloomberg reported yesterday, Western hedge funds are showing increasing interest in ruble assets. So, all other things being equal, the regime of negative rates in the leading economies of the world will contribute to the influx of capital into the Russian Federation.
With regard to Russian realities, Alexey Antonov agrees, everything is somewhat different here. Our economy is heavily dependent on the raw materials sector, so any fluctuations in the oil market seriously affect the internal policy of the Central Bank. In a situation where oil sank significantly and the currency soared to unprecedented heights, the Central Bank was forced to sharply increase the rate, otherwise the economy would have collapsed. Currently, the Central Bank adheres to the policy of fighting inflation, which is why the rate has remained at the same level.
However, how long will he stick to it, the expert asks, is also a difficult question, because a high rate one way or another affects the development of such an important sector of the economy as small and medium-sized businesses. A slight reduction in it at the next meeting of the Central Bank would have a positive effect on improving the economy, but, believes Alexey Antonov, it could hit the pockets of Russians.
It should be noted, however, that maintaining the rate of the Central Bank of the Russian Federation at the current level, despite the fact that economies everywhere are stimulated to grow by low rates, even minus, is also a dangerous practice. It is obvious that there is no other recipe for growth other than cheap money in the world economy today, and neither does our Central Bank. That’s why they hardly talk about growth there, preferring other goals and terms. However, despite the interest in Russia on the part of Western speculators, which does not bring us much benefit, although it feeds the money market (which then turns into a withdrawal of capital), these goals are hardly the optimal strategy. We have been told for many years that low inflation will lead to economic growth and real investment, but it is obvious that its decline does not correlate with economic growth in any way, rather the opposite.
Maybe we should stop being afraid of taking money out of citizens’ pockets - which is how high inflation is usually reproached - and just put it there, making it more accessible? But this is a completely different logic. As for the phenomenon of negative interest rates, of course, it requires observation and study; there is not much material on this new practice yet.
Let us recall that since October 27, 2014, this interest rate has been at a historically low level in Sweden: 0%. Now she is in the red.
At the same time, Riksbanken is buying government bonds worth 10 billion crowns, and is ready to buy more, the central bank said in a press release.
Riksbank analysts suggest that low inflation, which was at minus 0.3% in December at the rate of development for the year, may have already reached the “bottom”, so to speak, and will now begin to rise. In any case, the goal of 2% inflation per year is still far away.
Analyzing the situation in the surrounding world, the Riksbank concludes that the world economy is “bouncing back” after the financial crisis, but slowly. Since December last year, however, the risk of deterioration in economic development has increased. In particular, the fall in oil prices, which can have a positive impact on production growth, on the other hand, leads to low inflation on a global scale. The situation in Greece also does not add confidence in the development trends of the global economy.
As for Sweden specifically, the Riksbank believes that production growth is supported by both low oil prices, a weak Swedish krona exchange rate, and a low bank interest rate. According to the bank, Sweden's GNP will grow faster and the labor market will strengthen.
What will this “minus rent” entail for Swedish residents: What will happen to bank loans? What will happen to the money that people put aside “in reserve” in their bank deposit accounts? What will happen to our mortgage loans?
A negative refinancing rate means that banks have to pay to deposit money into their Riksbank accounts. And they are obliged to do this if, as a result of all banking transactions of the current day, they have money left in their cash desk (overnight/overnight deposits).
But will this mean that banks will want to cover these costs at the expense of their clients? And they will start charging us for the fact that we want to put our saved money into a savings bank account?
In principle, interest rates on our accounts or mortgages should not be affected by these negative rents. Because the level of interest on deposit accounts and on loans is determined by each bank individually, and not by the Riksbank.
But for the banking system as a whole, the level of this short-term refinancing rate is of great importance.
This rate determines the interest that banks pay when they borrow money from each other. It could also lead to businesses being able to take out loans at lower interest rates. And this, in turn, can lead to an increase in investment, that is, precisely the stimulation of the Swedish economy that the Riksbank is striving for by lowering the interest rate. And an increase in production usually “triggers” the mechanism of inflation growth. This is what the Riksbank is trying to achieve.
Experience of other countries with negative interest rates shows that if this minus is small, then this does not affect small clients who habitually save money in bank accounts. In Denmark, FIH announced in March last year (following the central bank's rate cut) that for every 1,000 kroner a customer holds in the bank, he will have to pay 5 Danish kroner. According to the Wall Street Journal, clients have already begun to leave the Danish bank. What will happen if other banks follow FIH, asks the rhetorical question of the newspaper Svenska Dagbladet today in its economic supplement.
Anticipating today's move by the Central Bank, two directors of large Swedish private banks have already spoken out on this topic and assured their clients that they - that is, all of us - will not have to pay to keep their money in the bank.
The two directors are Annika Falkengren from Svensk Enshilda Banken/SEB and Michael Wolf from Swedbank.
Mikael Wolf from Swedbank assured (in an interview with the Ekot newsroom) Swedish Radio that banks will do everything to protect their small depositors. Because otherwise, they - these depositors - will simply take their money from the bank and hide it, as they say, “under the mattress.” However, neither he nor his colleague Annika Falkengren can give any guarantees. No one can guarantee that the “negative rent” for banks will not turn into an equally negative rent for small depositors.
An expert on private economic affairs (microeconomics), Annika Creutzer, believes, for example, that “negative rent” will affect not only how and where people will store their savings, but also the level of wages. Here's how she explains the impact of this interest rate cut:
This means that when banks borrow money from the Riksbank, the Riksbank charges a fee for it. 0.1 percent. This means that banks will want to give us, clients, even more loans and credits, and these loans will cost us less. But there will be no interest on savings at all; this is a new situation for us. It is possible that we will also have to pay to open a savings account in a bank, says Annika Kreuzer, expert and journalist.
She describes inflation as the “lubricant” of the economy and explains its necessity in terms of paying for goods and services. The Riksbank's goal is to keep inflation low and stable. But now, due to growing concerns and turbulence in the global economy since December last year, the Riksbank is cutting interest rates and buying government bonds worth 10 billion crowns. The situation, however, is not unique to Sweden, says Annika Kreuzer:
This is an international problem. Sweden is a small country with an open economy, large exports and imports. We are influenced by what happens in the world. What is happening now in Sweden has already happened in Denmark and Switzerland.
Falling oil prices, problems in the eurozone, “limping” production growth in the US and the economic crisis in Greece - all this affects the Swedish economy. And it could be years before the situation changes, she said.
How will today's interest rate cut affect ordinary people? She answers this question:
I don't think there will be any changes in mortgage loans. But saving in a bank loses all meaning, because there is no interest on it. But it’s better to keep money in the bank, even if it doesn’t grow there, than at home under the mattress. Just for security reasons,” says Annika, meaning that you shouldn’t put yourself at risk of robbery or home theft if you hide money at home.
Annika Creutzer suggests that banks may increase fees for savings and savings accounts. There is little hope that interest rates on deposits will increase. But what is important, she emphasizes, is to check: does the bank have government guarantees for deposits? So that this money does not “melt” in the account over time.
As for the impact of a negative interest rate on wages, it assumes the following scenario:
It is likely that employers will say: since we are not paid more for our goods (i.e. there is no inflation), then we cannot raise wages. It is possible that for some categories of workers this will mean a reduction in wages, said Annika Kreitzer in an interview with our colleague Isabelle Swahn
Miles Kimball, an economics professor at the University of Michigan, spoke to CoinTelegraph about negative interest rates, the future of paper and electronic money, and the expected place of cryptocurrencies in the economy.
Interest in negative interest rates has grown significantly recently. They operate or have operated in Denmark, Switzerland, Germany, the Netherlands, Austria and Sweden. Some corporate bonds, such as Nestle and Shell, were also offered at negative interest rates.
What is a negative interest rate
A negative interest rate occurs if, having given your money to a bank or government, you receive back a smaller amount after some time. Essentially, you are paying the bank or government to temporarily manage your money. This strange situation occurs when many people who are very risk-averse seek a “safe haven” for their finances, and is usually the result of a large-scale recession in regions where there is virtually no economic growth (for example, the European Union).
CoinTelegraph: Why is it easier to introduce a negative interest rate with electronic money than with paper money? Can you explain how it would work with Bitcoin and e-dollars?
Miles Kimball: For money kept in a bank, introducing a negative interest rate is easy: just gradually reduce the account balance, even if no funds are withdrawn from it. On the other hand, paper money has specific numbers printed on it, so it is more difficult to impose a negative interest rate on paper currency. Among other things, this requires the use of an electronic dollar as a measure of value.
If the measure of value is the paper dollar, then the interest rate on paper currency is always zero (unless you tax paper money, which is much more difficult from an administrative and political point of view compared to an electronic monetary system). Thus, in order to be able to introduce a negative interest rate for monetary currency and other assets, the measure of value must be the electronic dollar. In this case, the central bank could impose a non-zero interest rate on fiat currency right at its own treasury level, where banks deposit or receive fiat currency into their accounts.
To conduct effective monetary policy, it is important that the central bank has control over the measure of value, and the electronic dollar as such may have many aspects of a cryptocurrency - perhaps enough to be considered a cryptocurrency.
As for private cryptocurrencies (like Bitcoin), they may well be a medium of exchange and a store of value, but monetary policy requires control over the measure of value. Central banks need to maintain control over the type of money that determines the measure of value - in this case, the electronic dollar. There are three key factors to ensure that the electronic dollar (or electronic euro, electronic yen, etc.) is used as a measure of value:
- requirement to calculate taxes in electronic dollars;
- accounting standards requiring accounting in electronic dollars;
- the need for coordination between companies, and between companies and households (similar to coordinated daylight saving time, but without anyone checking the clock).
C.T.: How can one introduce a negative interest rate in a cryptocurrency system?
MK: To be able to introduce a negative interest rate in a cryptocurrency system that uses Bitcoin or its equivalent for most transactions, the functions of a measure of value and a medium of exchange must be separated. This can be done with a non-Bitcoin e-dollar (it's also a good idea to have many different stores of value, but they're always available).
Currently, robots cannot conduct monetary policy as well as banks. Perhaps someday they will be able to do this, and then the responsibility for the electronic dollar can be placed on the computer. However, there will still be a need for a separation between the electronic dollar measure of value (controlled by a computer) and any asset that automatically receives a zero interest rate in its own terms (as Bitcoin currently does).
C.T.: Can Bitcoin be a currency? What do you think are its limitations?
MK: Bitcoin is already a currency, but it would be unwise to try to use it as a “full-fledged” currency. A good measure of value should have a constant value relative to goods and services, but Bitcoin is not like that. It cannot have a constant relative value without a much more complex emission control algorithm, far beyond the current capabilities of central banks. Designing and implementing good monetary policy is not easy.
The measure of value should be controlled by the institution best able to ensure its constancy across goods and services and, in the process, maintain the natural level of production in the economy. Currently these are central banks. Bitcoin's value fluctuates significantly relative to goods and services, and central banks (humans using computers) can so far manage monetary policy much better than the Bitcoin algorithm.
C.T.: Tell us about blockchain technologies in the context of central banks. What operations/tools is blockchain best suited for?
MK: I do not consider myself an expert on blockchain technologies, but it seems to me that they or developments based on them will be important to ensure the normal operation of electronic dollars. Electronic dollars include money in the bank, but they are very inefficient, their transaction fees are high, and banks will have to go the way of Bitcoin. Blockchain is a huge achievement that can significantly reduce the cost of processing transactions compared to modern banking methods. It will make electronic transactions much more efficient.
C.T.: What do you think about "currency wars» and their influence on central bank policies? Do negative interest rates have anything to do with them?
MK: “Currency wars” are mostly speculation and prejudice. If all countries follow an inflationary monetary policy, this is not a currency war, this is global inflation. Replace "currency wars" in everything you read with "global inflation" and you won't go wrong.
The only time the phrase “currency war” is justified is when a country sells its own assets and buys equivalent foreign assets. If all countries do this, their trades are partially canceled out, but if a country or its central bank buys assets at a higher interest rate than the assets it sells, it is a monetary expansion, not a strike in a currency war.
Of course, monetary expansion affects interest rates, but if another country is unhappy with this effect on its own interest rate, it should simply counter with its own properly calibrated expansion. Such a response is not a salvo in a “currency war”, but an element of normal monetary policy.
C.T.: What motivates central banks to introduce negative interest rates?
MK: The job of central banks is to ensure price stability and sustainable economic growth by maintaining natural levels of production. To do these two things well, you need to resort to negative interest rates at least sometimes.
The Fed, European Central Bank, Bank of England, and now the Bank of Japan are targeting 2% inflation over the long term because they have not yet added negative fiat interest rates to their toolkit. Willingness to introduce a negative rate makes it possible to reduce the target inflation rate to zero - to true price stability. Additionally, the ability to use negative interest rates helps nip a recession in the bud. I think these are big enough benefits that most central banks will eventually add negative interest rates on fiat currencies to their arsenal.
Miles Kimball, negative interest rate expert and electronic money advocate .
George Samman
