Finally, there’s little evidence that negative rates have held back lending. A recent ECB working paper shows deposits with commercial lenders have increased since the central bank introduced negative deposit rates. At the same time, companies with large cash holdings have cut their deposits and invested more. That’s exactly the goal of this policy.
In fact, banks that pass on negative rates to customers appear to provide more credit than other lenders. This suggests that, contrary to what those Wall Street titans say, the problem with negative rates is that not enough banks inflict them on their clients.
It’s certainly possible that monetary policy becomes less effective as central banks cut interest rates deeper into negative territory. Gauti Eggertsson of Brown University and Larry Summers of Harvard have looked at Sweden, a pioneer in cutting rates below zero. They concluded that while its first two negative moves reduced lending rates, this wasn’t repeated after two later cuts.
However, similar diminishing returns are seen in other unorthodox measures, including asset purchases. The authors also acknowledge that the rate cuts might have boosted Sweden’s economy via other channels, for example by depreciating the krona, allowing the government to borrow more and boosting asset prices.
Forcing people into speculative activity when asset prices are already at record highs is not exactly a recipe for financial security over the medium to long term. In the short-term it greatly increases bubble risk.Click HERE to subscribe to Fuller Treacy Money Back to top