- Major central banks now split on suitability of negative rates
- BOE governor sees policy as damaging for banks, savers
Mark Carney has looked at the road his most adventurous -- or desperate -- peers have taken, and decided it’s not for him.
While unveiling a multi-pronged stimulus package aimed at staving off a post-Brexit U.K. slump on Thursday, the Bank of England governor also drew a line splitting the world into monetary jurisdictions that will cut interest rates below zero, and those that won’t.
“What we’ve seen in other countries is, to be honest, they’ve got this a bit wrong,” Carney said in an interview on LBC Radio on Friday, a day after the BOE lowered its key rate to 0.25 percent and boosted quantitative easing. “The banks have actually, in some jurisdictions, have actually raised borrowing rates for mortgages, for example.”
With Carney also serving as head of the global Financial Stability Board, that may be as strong a negative indictment as the experimental practice has yet received, more than two years after the European Central Bank became the first major central bank to introduce it. While ECB President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda insist that sub-zero rates work, Carney is now firmly in league with U.S. Federal Reserve Chair Janet Yellen in saying the policy’s not for them.
On Thursday, Carney said below-zero rates in other countries have have “negative consequences” on the financial system and savers. Royal Bank of Scotland Group Plc said on Friday that the latest BOE rate cut threatened to undermine profitability by further squeezing its net interest margin, the difference between income from lending and borrowing costs.
“What he says about the U.K. doesn’t necessarily mean that the ECB is wrong,” said James Rossiter, an economist at TD Securities in London, and a former BOE official. “He understands why it works somewhere else and simply won’t work here. This is very much a fortuitous position to be in, in terms of having that insight into what other countries have done.”
While it’s true that the U.K. is less bank-reliant than the 19-nation euro area or Japan -- giving Carney more grounds to believe that charging lenders to park funds at the central bank wouldn’t work so well as a stimulant -- the global tide may have been turning against negative rates anyway.
In January, when the BOJ first cut below zero, Kuroda faced stiff criticism at home and abroad. The move backfired anyway when the yen rose strongly after the announcement. That reaction also highlights the second, even more controversial role of negative rates -- the idea that they might be used to push down currencies in a stealth attempt to become more competitive at the cost of other nations.
Carney has panned that approach in the past too. At a Group of 20 nations meeting in Shanghai in February, he warned that the world was at risk of entering a “zero-sum game” of currency wars. Yellen reiterated in June that sub-zero rates are not something the U.S. central bank is “actively looking at.”
Room to Move
Carney might not even need to consider negative rates. Even with the U.K. facing a potential contraction in the wake of the June 23 vote to leave the European Union, he’s still got more policy room than either Draghi and Kuroda, and his economy’s not in such bad shape.
“The problems in the euro area and Japan are bigger, deeper, and they may need to be more experimental,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in New York. “The U.S. and the U.K. are in a different place.”
Yet while Carney was firm in his rejection, he may rue that line if things don’t go as well as his forecasts suggest, according to Adam Posen, a former BOE policy maker and president of the Peterson Institute for International Economics.
“I think the governor is wrong to rule it out,” Posen said in an interview on Bloomberg Television. “Monetary policy always has the aspect of what you’re going to do next,” he said. “Operationally, that was the wrong call.”
Central bankers do have to change their minds sometimes. Draghi, after cutting the ECB’s deposit rate to minus 0.1 percent in June 2014, described that step as the lower bound “for all practical purposes.” The Frankfurt-based central bank cut again only three months later and has done so twice more since.
Indeed, Carney’s current view doesn’t have complete backing on the Monetary Policy Committee, with policy makers including Gertjan Vlieghe saying going below zero is technically a possibility.
“We’ve seen in other jurisdictions, we understand the dynamics of it,” Carney said on Thursday. “We’re not intending to move to negative interest rates. At least, I’m not intending to move to negative interest rates.”