The ECB, the Fed, and the National Bank of Switzerland do not rule out the possibility of lowering interest rates below zero.
Category: Blog
ECB: What do negative interest rates do?
Responding to press conference questions, ECB President Mario Draghi has said the ECB is ‘technically ready’ to bring interest rates below zero.
Yesterday, Bloomberg reported rumors that the ECB is ready to act. Today, Draghi denied that there is anything new happening on this front, and ECB Board member Asmussen said he’d be cautious about using negative rates.
While traders keep trying to guess Draghi’s next move, one may want to consider, one more time, the effects of negative interest rates.
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Big news from Frankfurt…or not?
“ECB Cuts Rates Unexpectedly as Low Inflation Threatens Recovery”
“The ECB cut the main interest rate at which it lends to banks to 0.25%”
“The ECB showed the need to act”
Wait a minute.
The interest rate that matters for monetary policy (this is the rate on loans between banks) is already below 0.1%, so today’s move is not going to get this any lower!
Today’s move does nothing except sending another signal that the Euro economy is in full deflation, and the ECB is likely to keep the current rates that low for a longer time.
No actual change of interest rates.
And no impact on the real economy, anyway.
Just more evidence that the overall European deficit is too low!
George Soros’s (incomplete) proposal to save Europe
George Soros has formulated one more call for Eurobonds here.
I’m in agreement with most of it. Yet, not all.
- Divergence in the Eurozone was largely caused by Germany not complying with the 2% inflation rule. Deflation, ever since 1999, gave Germany a means to lower the real exchange rate and steal demand from its partners (beggar-thy-neighbor).
- There is nothing good with Greece running a surplus: A surplus means that financial assets owned by the private sector are reduced by the same amount (as a matter of accounting).
- Eurobonds would compare well with U.S. Treasuries if and only if the ECB agreed to be the lender of last resort of the Eurozone
- Remedying the euro’s main design flaw requires more than Eurobonds: There must be, at a minimum, a means to let automatic fiscal stabilizer work. Today, fiscal stabilizers cannot work and fiscal policy is pro-cyclical, as described in the chart here.
- Hitler was the outcome of harsh reparations plus the 1931 crisis that was caused by austerity and the Reichsbank not willing to fund German Treasuries for fear of inflation.
The problem with Quantitative Easing…
… was illustrated today by Raghuram Rajan, the Reserve Bank of India governor, along these lines:
Rajan also questioned the existing monetary policy stance of industrial countries. Specifically, he asked whether pushing real interest rates lower through forward guidance, asset purchases or nominal rate cuts was “part of the solution, or part of the problem”.
The slow pace of growth, he said, casts doubts over whether the low interest rate environment was really encouraging people to spend and invest more.
He observed that the main spenders before the crisis were typically the people who were hit the hardest, and made the point that people who had borrowed against their houses were now struck with negative equity.
The people who saved before the crisis, he said, were largely saving for their retirements. After the crisis they find themselves needing to save more, a problem that is compounded if the central bank pushes down real interest rates and reduces their income further.
In other words, low interest rates have a contractionary effect.