How Much Will You Pay to Park Cash as Central Banks Go Negative?
Bloomberg - Feb 27, 2015
Central banks are stooping to new lows to conquer weak inflation.
The monetary guardians of the euro area, Switzerland, Sweden and Denmark are now imposing negative interest rates on bank deposits or on funding operations that feed through to the real economy. Analysts at Commonwealth Bank of Australia reckon almost a quarter of worldwide central-bank reserves now carry a negative yield.
By confounding the onetime idea that they had to stop cutting borrowing costs at zero, monetary-policy makers are seeking to spur spending over saving. They also expect their currencies to weaken as capital inflows are discouraged.
The risk is that negative rates backfire and result in even less demand. That could happen if people begin stuffing their cash under mattresses, or if rates below zero eat into the profit margins of banks or distort financial markets.
As more central banks nevertheless begin negative campaigns, economists are beginning to question just how low they actually could go. Analysts at Barclays Plc suggest the answer may be “considerably lower†than the minus 75 basis points now seen in Switzerland and Denmark.