Central bankers and financial institutions worldwide are concerned that negative interest rates are garnering a bad reputation. The asinine monetary policy move hasn’t been greeted too well by consumers, savers and many economists.
Before we get into the details, here are the central banks with subzero interest rates:
ECB: Deposit rate is -0.4 percent
Bank of Japan: Rate is -0.1 percent for some reserves
Swiss National Bank: Main interest rate is -0.75 percent
Swedish National Bank: Main interest rate is -0.5 percent
Danish National Bank: Deposit rate is -0.65 percent
Any worries that the general public have are too narrow, says the International Monetary Fund in a new report released Wednesday. Jose Vinals, the IMF’s financial counselor, told reporters at a press conference that the bad reputation is incorrect because the policy direction has led to positive gains in Europe and Japan.
“In my judgement, negative interest rates are useful for relaxing monetary and financial conditions which should support aggregate demand and also price stability,” said Vinals. “It is true there are limits to the use of negative interest rates, for how long they can be, and how far down they can go.”
With that being said, Vinals thinks that some financial experts overlook the benefits of boosting demand, even if it damages savers and bank profits. He notes that savers, though, benefit from subzero rates with a better economy and banks can see higher prices on their balance sheets.
“There may be some distributional consequences from savers to debtors but the gains are bigger than the losses,” Vinals stated.
Vinals also made the case that this unconventional monetary policy tool doesn’t lead to political populism. He notes that what politicians have to do is tell their people that subzero rates and other stimulus measures are aiding the economy.
“Negative interest rates, like the other stimulus policies of the European Central Bank, are helping the European economy and politicians should be telling this message to the population,” Vinals told CNBC.
“I think populism is fueled by other things and to me, one of the key sources of populism has to do with the lack of economic recovery that we have, which is not strong enough, and also with non-economic factors, which have to do with the attitudes of certain parts of the population vis-à-vis tourism or refugees.”
The IMF official averred that he’s glad central banks used conventional monetary policy measures to save the global economy from the 2007-2008 economic collapse.
“I would not like to have lived in a world which would have to face the consequences of central banks not having acted during the crisis. I would not have lived in another world of a Great Depression. We still went to a Great Recession, now we have an economic recovery and I think that was most importantly the work of the central banks.”
Both the Federal Reserve and the Bank of Canada (BOC) have said that subzero rates are on the table if some sort of financial crisis or economic catastrophe transpires.
–AM
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