Europe: Did the banks cry wolf on negative rates?
As the howls of anguish at negative interest rates reach a crescendo, central bankers and prominent economists are still convinced that Europe’s financial sector would be even worse off were base rates above zero. Banks are increasingly vocal in their opposition to the policy. Are they right to believe the systemic risks are growing? And could a move away from negative rates hurt banks more than if the ECB kept them?
Illustration: Peter Strain
If long-term negative rates haven’t worked in Sweden, what chance do they have of working for the economies of the eurozone?
The Riksbank’s decision to hike its repo rate to zero in late December has symbolic importance, as it was the first central bank to cut rates below zero a decade earlier. Given Sweden’s growth is now lower than it has been for most of the past 10 years, the decision supports the view that the risks to financial stability are now becoming so great that negative rates cannot go on.
Bankers – whose job it is to transmit monetary policy to the real economy – have long argued that negative rates could end up doing the opposite of what they are meant to do or even lead to bank runs. According to many of them, as it is practically and sometimes legally impossible to charge the bulk of depositors a negative rate, the only way to offset the money they lose on central bank deposits and government bonds could be to lend less and to raise prices for credit to businesses and consumers.