The international push to a world of negative interest rates persists. The latest culprits, or at least eventual culprits, are South Korea and France.
Francois Villeroy de Galhau, the head of the Bank of France and member of the European Central Bank (ECB)’s governing council, argued that, even though there are limits to the policy, there is a use for subzero interest rates.
Although he refused to outline those limits, he noted that negative rates can be part of a much bigger picture to spur inflation, purchase assets and provide inexpensive loans to financial institutions.
“Negative rates are one tool among others,” Villeroy de Galhau told the European Parliament’s economic and monetary affairs committee in Brussels. “They are a useful tool, but they have their limits.”
The ECB recently slashed rates to minus 0.4 percent.
Meanwhile, over in South Korea, Song Young-gil, a lawmaker of The Minjoo Party of Korea, told the press that the Bank of Korea (BOK) is interested in negative rates.
The Korean official revealed that the BOK had signed a contract with an array of groups of economists in August and September to perform research on subzero rates. The central bank is looking to determine the correlation between negative rates and fiscal prudence of banks.
He noted that the consideration of negative rates is the central bank’s idea of looking after the national economy and being mindful of the next presidential election.
“Amid the rapidly rising household debt, considering negative interest rates is deemed as a move toward the presidential election,” Song said. “Rate policy should not be used for the election.”
The BOK denied the politician’s comments and the widespread reports.
Negative rates are a policy tool that have dominated monetary policy discussions all over the world for much of the year (SEE: Will negative interest rates dominate monetary policy in 2016?). Several jurisdictions have imposed the unconventional measure, and several more are looking into the possibility.
Former Federal Reserve Chair Ben Bernanke urged the United States central bank to refrain from dismissing “extremely helpful” negative rates so quickly (SEE: Ben Bernanke thinks Fed shouldn’t rule out ‘extremely helpful’ negative interest rates).
“It would be extremely helpful if central banks could count on other policymakers, particularly fiscal policymakers, to take on some of the burden of stabilizing the economy during the next recession,” Bernanke wrote earlier this month.
“Since that can’t be assured, and since the current low-interest-rate environment may persist, there are good reasons for the Fed and other central bankers to consider changes in their policy frameworks. The option of raising the inflation target should be part of that discussion. But … it is premature to rule out alternative or potentially complementary approaches, including the possibility of using negative interest rates.”
His successor, Janet Yellen, has already conceded that the Fed would potentially introduce negative rates if the national economy collapsed. Also, Fed Vice Chair Stanley Fischer recently averred that subzero interest rates are working elsewhere around the world.
This is one of the last policy tools at their disposal to stimulate growth. Helicopter money is likely the last instrument available for central banks.
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