Back in July 2016, I penned a blog that discussed the novel, and potentially dangerous, way several world economies tried to stimulate their nation’s economies by forcing negative interest rates.
To date, seven foreign central banks have adopted negative interest rates to stimulate their national economies. On the list are Japan, European Central Bank, Denmark, Sweden, Switzerland, Hungry and Bulgaria. Taken together, these economies represent about one-fourth of global economic output.
The goal of implementing this were two-fold:
- The first is to encourage consumer spending and business investing by making it cheaper to borrow and less lucrative to hold onto cash.
- The second reason is to lower the value of the national currency to make exports more appealing to trading partners and to create an expectation of future inflation which may further stimulate current spending.
The greatest fear regarding negative interest rates is a mass exodus from the banking system, which has not occurred. Banks, by and large, have decided to keep depositors’ whole. They realize it would be bad for business if they took your $1 and only gave you 95 cents back. The downside to doing this is their net-income, the difference between what they charge customers to borrow and what they pay for funding, has decreased along with their pre-tax profits. While bank’s balance sheets have weakened because of NIRP’s, there is no evidence to date this has exacerbated their financial position meaningfully.
Surprisingly, NIRPs show limited effects on exchange rates. The smaller central banks that implemented NIRPs to weaken their countries’ currencies do not seem to have been successful in doing so. Even the largest central banks, the Bank of Japan and the European Central Bank, have seen only modest success in implementing NIRP. The hypothesis is the Euro-centric countries exchange rates, those of Denmark, Sweden, Switzerland, Hungry and Bulgaria, were, by proximity, pegged to the Euro thereby “anchoring” the exchange rates. Additionally, the absolute interest rate spread may simply have been too narrow to have had an effect.
A year into the experiment, the results are mixed but generally positive.