- The peaks and troughs of rates have fallen over three decades
- Deutsche Bank suggests ECB may never lift deposit rate above 0
The report from once-uncharted monetary territory: there’s little to be scared of.
Now that Sweden and Switzerland have shown that negative benchmark interest rates don’t necessarily result in flights to cash, asset bubbles or banking strains, the global giants of central banking may be more willing to embrace sub-zero borrowing costs the next time their economies slide.
“There’s a very real chance unorthodoxy becomes the new orthodoxy,” said Alan Ruskin, global head of Group-of-10 currency strategy at Deutsche Bank AG in New York.
While financial markets are focused on the Federal Reserve’s looming rate increase, policy makers and economists are already changing their attitude toward negative rates.
European Central Bank President Mario Draghi is open to reducing the rate he charges banks to leave money in his coffers overnight further into negative territory. Bank of England Governor Mark Carney has also revised his thinking to say the U.K. benchmark could fall below 0.5 percent if needed having previously worried deeper cuts would roil money markets.
Meantime, Fed Chair Janet Yellen said last week that “if circumstances were to change” then “potentially anything, including negative interest rates, would be on the table.” One of her policy-setting colleagues has already advocated them for next year.
Plumbing new depths the next time economies stumble would continue the pattern of the past few decades in which each of the peaks and troughs in rates were more often than not lower than in the previous business cycle.
Back in 1984, Fed Chair Paul Volcker lifted the federal funds rate to 11.75 percent before cutting it to 5.88 percent two years later. By contrast, the last expansion saw the benchmark top out at just 5.75 percent before being cut to near zero.
Reasons for the pattern include the success in squeezing inflation out of economies that had been plagued by double-digit price gains in the early 1980s. The decline in volatility gave officials more room to try to stoke demand and, critics would say, asset bubbles.
A glut of savings also played a part. along with the the argument that the natural rate of interest, the level at which inflation is stable and output at trend, has been in decline for decades.
The aim of negative rates is to spur spending and lending by penalizing savers and banks sitting on cash. It also helps that they tend to weaken currencies.
Sweden’s key rate is already minus 0.35 percent and Switzerland’s is minus 0.75 percent. The ECB’s deposit rate is minus 0.2 percent and may be cut further next month, while Denmark’s is minus 0.75 percent.
Central bankers are already signaling when they do lift rates they will do so by less than last time, preserving the trend of lower peaks. The median estimate of Fed policy makers is for the long-run neutral fed funds rate to be 3.5 percent. Carney talks of raising rates in a “limited and gradual” way.
Richard Barwell, an economist at BNP Paribas Asset Management, argues that policy makers will still hope to use regulatory tools more next time their economies are in trouble, reducing the need for monetary stimulus. It’s also premature to say that rates will be lower than in the past, he said.
Ruskin nevertheless holds out the possibility that leading central banks will go negative next time and even that the ECB’s deposit rate may not see positive territory again.
“It’s not even clear you’re going to get zero at the peak of the cycle in Europe,” he said. “One hopes U.S. rates will be meaningfully positive in the next cycle, but that can’t be taken for granted in Europe.”