The policy of negative interest rates applied by Central banks in Europe and Japan, influenced a quarter of the world’s GDP and affected more than 500 million people, came to the conclusion analysts of the international rating Agency Standard & Poor’s according to the results of a study on the impact of negative rates on the economy of the developed countries of the Eurozone, Japan and Scandinavia. They call the introduction of negative rates are a sign of desperation of the Central banks and the fear that in the future this situation will lead to unintended consequences.
As explained analysts at S&P, the complex political situation complicates the use of are often more effective fiscal policy, which the financial authorities are forced to resort to unconventional measures, including the “most unconventional” and “unprecedented” — the introduction of negative rates.
In March, the European Central Bank (ECB) lowered the benchmark interest rate from 0.05 to 0%, the interest on loans from 0.3% to 0.25%, on deposits from minus 0.3 to minus 0.4%. Thus, the regulator expects to spur economic growth and accelerate inflation, which is still not acceptable to developed economies 2%. To the policy of negative rates had also adopted the Central banks of Denmark, Japan, Sweden and Switzerland.
S&P warns of possibility of “feedback loops”, when negative interest rates provoked an increase of excessive risk and put pressure on the Central Bank, who in such conditions are forced to resort to more stimulus. “Feedback loop” can be avoided if the policy of negative rates will lead to growth of GDP, maintaining the ability to service the debt of enterprises and households, as well as easing deflationary pressure in the economy, says managing Director S&P Global Robert Palombi.
Negative interest rates also contributed to the fall in the bond yield: 50% of all sovereign bonds in the world, included in the government bond index S&P Global Developed Sovereign Bond Index, now have a negative yield. Affected pension funds and insurers, because they have reduced investment income — the basis for the execution of long-term liabilities of these institutions. Now they are forced to seek other options of obtaining income, in particular to invest in more risky assets.
The policy of negative interest rates may result in banks losing profits due to the need to pay banks for keeping money on their accounts, choose to keep their cash reserves in cash. “This means the increase in operating expenses and an increase in the risk of theft,” explained analysts at S&P.
However, according to analysts S&P, negative interest rates in the Eurozone may have predicted catalytic effect to spur Bank lending and weaken the Euro. The success of the policy of negative interest rates may come to naught because of the decision of the UK about leaving the EU, further weakening the pound and the introduction of the Bank of England’s quantitative easing program in early August. While the ECB by introducing negative interest rates expected to reduce the Euro-dollar exchange rate, the weakening of the pound against the us currency can to prevent it.
The conclusions of the analysts of S&P coincides with the economists of the International monetary Fund (IMF), who conducted a similar study. According to their estimates, the policy of negative interest rates has reached the limit and the ECB needs to focus on the program of buying assets. As the rating Agency, the IMF has noted the negative effect of negative rates on the profitability of banks and their ability to lend to companies and households.