Negative interest rates
The risk-on mood has been powerful these days.
I stick to my recommendation of a cautionary stance with regards to the efficacy of policy intentions. The expectations of further interventions are indeed very high, a good example being negative interest rates (see below). At the same time their effects are increasingly challenged by the markets themselves.
The reason being: current policy options lead to poor or even counterproductive results.
The FT covers the issue in ‘Central banks, negative thinking’: (emphasis is ours)
Here we go: when easing policies fail to deliver, other forces must be at play. We nicknamed this phenomenon ‘systemic convergence’ as financial and economic stability may be at stake.
Stephen Roach also refers to financial (in)stability when assessing negative interest rates in the context of policy transmission.
Please consider ‘Central Banks go negative‘:
Let us reformulate our thesis of systemic convergence :
- What if, by continuously adding new layers to their unconventional policies – in this case negative interest rates – Central banks had self-engineered systemic cracks ?
- What if these fissures would lead to the exact opposite, counter-productive policy responses ?
We suggest: when systemic risks are at stake, central banks have no other choice but to let the markets find their way, otherwise they would perilously harm the economy.
Roach has a clear take about it: