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Negative Interest Rates – Good or Bad for An Economy?

The Swiss National Bank (SNB) is about to release the Financial Stability Report today, assessing the conditions in the financial system as well as the potential risks for economic and financial stability. As one of the banks running a policy of negative interest rates, it is closely watched by investors around the world in regard to the impact on the economy – positive or negative?

Truths and Myths About Negative Interest Rates

Some argue that, for negative interest rates to work, one needs a particular type of economy. In other words, such a policy will not work in all parts of the world.

Sweden is one example, who abandoned the negative interest rate policy as it did believe it was working for its economy. However, it depends a lot on how one defines negative interests.

For instance, the European Central Bank (ECB) keeps the deposit facility rate below zero, at -0.5%. However that is only one of the three interest rates it sets – the other two, the refi rate and the marginal lending facility, are positive. Therefore, one can argue that the ECB has a partial negative interest rate environment, and any conclusion drawn from the way the Eurozone economies performed in the meantime, should not be extrapolated.

The SNB, though, keeps the entire policy rate at -0.75%. What is curious here is that the consensus among economists (and some central bankers) is that going beyond will cause depositors to just hold cash. Perhaps this is the reason why the SNB does not lower the policy further – we do not know that for sure, as it was never tested. After all, why not dropping the policy to -5%, or more?

The real issue with interest rates (not only negative but positive too), is that they affect the entire spectrum of the yield curve, eventually. Also, they affect various population segments. For instance, savers and pensioners (people living on fixed income), may see negative interest rates as burdensome. However, the aim of a central bank is to set an interest rate effective for the economy as a whole.

It seems that there is no edge the central banks will not try to test to see at least the effects of their measures. Initially, the overall belief was that quantitative easing programs would create inflation. False.

Wouldn’t it be more appropriate for investors to keep an open mind about negative interest rates too?

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