The efficacy of negative interest rates has been a well debated topic with Mark Carney, the Governor of the Bank of England, making clear his view clear with an emphatic dismissal of the use of this policy tool: "I’m not a fan of negative interest rates. We've seen the consequences of them in other financial systems. We have other options to provide stimulus if more stimulus is needed so we don't need to go to that resort." For him “the effective lower bound is a positive number, close to zero.”
Unconventional monetary policy and negative rates continue to bring unintended consequences. Globally, more and more sovereign bonds (over USD 10 trillion) now trade on negative yields with the 10 year German bund also joining the club. As negative rates and QE are being pursued policy outcomes are becoming less predictable than might have originally been hoped for. For example, currency moves are not necessarily as central banks predicted: take Japan, where the shift to negative rates earlier in the year was expected to help the currency weaken and boost growth and inflation. In fact the Yen has strengthened, exacerbated by the latest meeting, when the BoJ left policy unchanged and the Yen strengthened breaching the JPY105 level against the US dollar. At the time of writing the Yen is trading at ~104.28 to the US dollar; at the moment the market is not heeding attempts by government officials to ‘talk down’ the Yen. The Finance Minister, Taro Aso, called for global coordination to address these disorderly moves in the foreign exchange market.
We have long spoken of our thoughts on negative interest rate policy (NIRP), quite frankly we do not believe it is an effective strategy to avoid the deflationary spiral, or spur growth. Unfortunately for the likes of the BoJ and eurozone, there was very little ammunition left on the table to deploy. In Denmark, where negative rates were adopted almost four years ago, studies show that NIRP is counter-productive as the private sector for example is actually saving more than when rates were positive!
Yet again the IMF has downgraded their global growth estimates to 3.2 percent for 2016 and 3.5 percent for 2017. Their policy prescription is more proactive use of fiscal policy and structural reform in conjunction with already supportive monetary policy. Indeed a criticism of current policy is its over-reliance on central banks and that the prolonged use of QE and negative rates bring unintended consequences. Olivier Blanchard, now at the Peterson Institute in Washington, but formerly the Chief Economist for the IMF, said he is wary on the use of negative rates saying “I don’t like it, I think it interferes with the business of banks in ways that are very complex” instead “I much prefer what we now call regular QE.”