Embrace negative rates, central banks cautioned
Message taking on urgency as U.S. investors, analysts brace for looming recession
Negative interest rates are back in the spotlight.
Investors and analysts are redoubling their warnings that, with global borrowing costs already so low, central banks will need to be prepared to cut interest rates deep into negative territory in the next economic downturn.
The message is taking on urgency as anxiety builds that the U.S. is nearing the end of its current economic expansion cycle.
“I don’t think the central bankers would like to go back into negative rates once they get out of it, but the reality is they may well have to dur- ing the next recession,” Iain Stealey, the head of global aggregate strategies at JPMorgan Asset Management in London, said in a Bloomberg TV interview Monday.
The market value of the world’s negative-yielding bonds has jumped almost 25 per cent over the past month to $8.6 trillion (U.S.) amid slower-than-forecast inflation data and as investors piled into the safest securities, as perceptions of geopolitical risk increased. That’s happened even after Federal Reserve officials started raising benchmark borrowing costs and said they would begin running off their $4.5-trillion balance sheet “relatively soon.”
Several central banks in Europe cut rates below zero in 2014, followed by Japan in 2016, in a bid to encourage riskier investments and jolt lending. Enduring lows in global interest rates are spurring a renewed debate about the efficacy of charging depos- itors to hold onto their savings. At some point, consumers will rebel against the idea of losing money on bank deposits and move more of their assets to cash.
In a new paper published in the Journal of Economic Perspectives, Harvard professor Kenneth Rogoff makes a case for negative rates, exhorting policy-makers to develop the market infrastructure now for their widespread adoption before the next downturn strikes.
“It makes sense not to wait until the next financial crisis to develop plans and, in any event, it is time for economists to stop pretending that implementing effective negative rates is as difficult today as it seemed in Keynes’s time,” he writes.
The low interest rates this late in an economic cycle is without precedent. Rogoff notes the Federal Reserve cut borrowing costs by an aver- age of 5.5 percentage points in the nine recessions since the mid-1950s — an impossibility today without negative rates.
“The growth of electronic payment systems and the increasing marginalization of cash in legal transactions creates a much smoother path to negative-rate policy today than even two decades ago,” Rogoff writes.
He adds that other stimulus tools, such as quantitative easing and forward guidance on policies, have been deployed for several years and are now likely to be less effective.
“Assuming we normalize over the next couple of years, going back to negative rates is certainly possible,” Reinhard Cluse, chief European economist at UBS AG, said in a Bloomberg TV interview Monday.
Although the chance of a recession happening in the U.S. over the next12 months is just 15 per cent, according to the median estimate of 40 economists surveyed by Bloomberg, the clock before the next downturn is ticking. The latest cycle of economic growth in the U.S. kicked off in June 2009, making the current period of expansion the third-longest since the 19th century.