Negative Interest Rates Will Likely Hurt, Not Help, Economic & Financial Stability

Written by Rick Rieder

There’s a view in some policy circles that easy monetary policy is good for an economy, and the more stimulus you add, the better…This latest stimulus is taking the form of negative interest rates, or charging banks to park their cash with the expectation that this will spur lending and economic growth…In my opinion, however, negative rates—or high rental costs for money storage—are excessive and more likely to hurt, rather than help, economic and financial stability.

Here are a few reasons why:

1. Global Economy Experiencing Growth Headwinds Unlikely To Be Positively Influenced By Negative Rates

One of these headwinds is an aging population, which is likely to lower the corridor of potential economic growth for many years, especially in developed markets.

…In many countries and regions—including Japan, Europe and increasingly, China—higher numbers of people are drawing from their respective economies rather than contributing to it.

Traditional economic metrics aren’t keeping pace with the influences of rapid technological innovation, meaning the global economy is likely doing much better in reality than what economic numbers are telling us. Just one example of what traditional metrics don’t capture: Technology has dramatically brought down “bad” inflation (i.e. the cost of food, energy and rent), a fact not reflected in traditional U.S. inflation numbers.

2. Negative Interest Rates Functionally Take Money From Borrowers and Hand It To No One

Central banks initiated aggressive rate cuts in the immediate aftermath of the financial crisis in order to stabilize the system by reducing excess leverage as quickly as possible. Consequently, a short-term subsidy from savers to borrowers through the interest rate channel made a significant amount of sense at the time.

Now, however, moving to extreme and excessive robbing of savings through charging for storage takes money from savers but doesn’t significantly enhance demand among borrowers. In fact, businesses and consumers may have a lower marginal propensity to spend in uncertain economic times.

In addition, negative interest rates act on the overnight funding rate, or the front end of the yield curve, at a time when few businesses use short-term funding for their borrowing needs. Thus, negative rates seem to merely charge savers and penalize financial institutions through lower net interest margins and consequently, compressed cash flow.