Conventional thinking is that negative rates
are just a natural continuation of quantitative easing, like dialling
down the air conditioning. This, though, underestimates how financial
intermediaries may actually respond. They erode banks’ margins. They
give lenders an incentive to shrink, not grow. They encourage banks to
seek out opportunities overseas rather than in their home markets. They
also risk disruptions to bank funding. All go against the grain of the central banks’ desire to ease credit conditions and support financial stability.
Negative rates could also start to erode consumer trust in banks as the right place for their cash because bank consumer always pursues positive nominal interest rates. Will negative interest rates encourage banks to lend more plentifully and cheaply and help support economic recovery?
Link: http://www.ft.com/cms/s/0/018ea7f8-ef67-11e5-9f20-c3a047354386.html#axzz43msaBRP7
Didn't the bank of Japan just recently launch negative interest rates? What will be the effect of this launch? How has this worked out for countries that have done it in the past? In recent history, Sweden was the first to put negative rates in place. Between July 2009 and September 2010 Sweden cut the deposit rate to -0.25% in an attempt to fend off the deep recession that followed the 2008 banking crash and global financial crisis. It reintroduced them in July 2014 and the deposit rate is currently -1.25%. Sweden’s central bank became the first country to lend at a negative rate when in February 2015 it announced a negative repo rate – its main lending rate to commercial banks. Many economists say that this is largely a technicality because of the way its banking system operates.
ReplyDeleteI am curious how much this influences investment. If people are really changing how quickly they spend their money once they get it or if they simply save in foreign banks (like mentioned above). I am also curious if its different by income class, if those that are wealthy are more likely to save in foreign banks and not have it impact their spending domestically as much. While, I wonder if middle-lower income class people are less likely to save more in the first place, let alone in a foreign bank.
ReplyDeleteI watched this video a few weeks ago, and it explains the current situation, or really crisis facing Japan.
ReplyDeletehttps://www.youtube.com/watch?v=Njp8bKpi-vg
As for wether or not the negative interest rates will work, Japan serves as a great example, though if they fail, it will have a large economic impact, but even larger political implications with the rising tensions in Asia.