Written by Mark John and Dara Ranasinghe
LONDON (Reuters) – Europe’s decade-long experience of negative interest rates, which ended on Thursday with the Swiss National Bank’s return to positive territory, showed one thing: they can exist outside the realm of economic science fiction.
Launched to revive economies after the 2007/2008 financial crisis, this policy turned standard financial wisdom on its head: banks had to pay fees for depositing cash with their central banks; Some homeowners have found mortgages that have paid them interest; And the rewards for the act of saving nearly everyone faded.
With the practice now abandoned in the face of accelerating inflation caused by the pandemic and the Ukraine war, doubts remain about its effectiveness and under what conditions it will be used again.
“I think the crossbar is likely to be higher in the future,” said Claudio Borio, head of monetary and economics at the Basel-based Bank for International Settlements that serves as the bank for the world’s central banks.
Monetary policy rarely generates as much force and anger as did the resort in early 2010 to negative rates by four European central banks and the Bank of Japan – now the only monetary authority still holding on to it.
With interest rates at the time already close to zero, they ran out of conventional ammunition to stave off outright deflation, which they feared would stifle the economic recovery. They decided that the only way out was to go below zero.
Bank chiefs from the European Central Bank, Sweden’s Riksbank, the Swiss National Bank (SNB) and the Danish National Bank turned negative in moves they said undermined the entire banking business model of being able to take profits from lending.
Local media joined the criticism, with Swiss newspapers in 2015 calling the moment “Frankenshock” and German newspaper Bild calling then ECB President Mario Draghi “Count Draghila” for “sucking our accounts dry”.
To be sure, those who relied on the return on monetary savings clearly suffered during the European period from very low to negative rates – even if they could at least profit from the fact that low inflation was protecting their initial savings.
Other side effects are difficult to discern.
Fears of negative rates leading to hoarding of money proved largely unfounded: in Switzerland, for example, the number of 1,000 franc banknotes in circulation remained the same, indicating that customers did not withdraw cash to store in a safe at home.
As a Danish bank bragged about the world’s first negative mortgage, cheap borrowing has likely added steam to rising house prices across the region. But prices were often shrinking due to local factors including a lack of supply.
While many other elements are at play, eurozone bank shares have fallen about 45% since 2014 – despite moves by the European Central Bank to protect them with fee waivers on some deposits and access to very cheap borrowing.
However, a report to the European Parliament by Bruegel think tank last year concluded that overall banking sector profits were not significantly affected by negative rates, noting that the downside was offset by gains in asset investments.
“In the end, they worked out the same way as normal price cuts,” report co-author Gregory Claes said, while acknowledging that the effect might have been greater had the experiment continued longer.
It’s hard to answer the question of whether negative rates actually hit their targets given the modest extent of the experiment – no one has ever fallen below 0.75% – and the fact that the upheavals of the past two years have been brushed aside.
European Central Bank policymakers point to data showing eurozone lending was shrinking year on year in 2010 until negative rates helped turn that into growth by 2016 – although that growth never reached pre-2009 levels. .
Others point to the fact that the negative rate period coincided with massive quantitative easing in which the European Central Bank and other central banks around the world boosted demand through trillions of dollars in asset purchases.
“This was a much bigger deal — and it was more impactful,” said Brian Colton, chief economist at Fitch Ratings. “Use your balance sheet aggressively – this is a powerful weapon.”
Some economists argue that negative rates create perverse incentives that ultimately harm the economy – for example by maintaining “zombie businesses” that must be rolled back by rights, or by removing the momentum for governments to push through drastic reforms.
“What’s missing, in Europe, is the focus on structural reforms. Why haven’t they happened in the last 10 years, why haven’t we boosted productivity growth?” Société Générale OTC: Chief European Economist Anatoly Annenkov said.
Burkhard Farnholt, chief investment officer of Switzerland, Credit Suisse Switzerland, goes further, saying that the message they send about investing in the future was closer to nihilism than the phrase “no future” in the 1977 Sex Pistols punk track “God Save” . the Queen”.
“It is the central bankers who have raised interest rates to a level where we do not attach value to the future,” he said. “The bad guys today wear white shirts, gray suits, and a blue tie.”
As the era of negative prices approaches, the volume of global negative-yielding assets has shrunk to less than $2 trillion from the 2020 peak of nearly $18 trillion.
Despite the misgivings, others say experience has at least shown policymakers that rates can drop below zero, and that’s an option for them: Watch the fact that the Bank of England considered for a while that this path was COVID-19 devastating the economy.
Even if the current bout of inflation means that it may take some time before Europe’s central bankers need to use negative rates again, it is unlikely that they will want to rule it out.
“It will always be talked about as something that is still in the toolkit,” said Rohan Khanna, a strategist at UBS in London. “I seriously doubt anyone here is willing to say no again to negative rates.”