Central banks can cut rates well below zero, says JP Morgan
Global markets have entered something resembling a tailspin, with the impetus most likely being the introduction of negative rates in Japan and further moves below zero in Europe. One way of doing this is that the central bank credits the government’s account and records it as non-redeemable and non-interest bearing receivable.
But the three-tiered system, which limits negative rates only to marginal excess bank reserves, “is carefully created to mitigate aggressive impact on banks’ profitability while ensuring the effect of negative rates on prices in financial markets”, said Nakaso, who walked a stage and pointed to charts to make his point at a conference here. They want to keep the value of their currencies low so the products they sell are more competitive, and to do that, they want to drive interest rates as low as they can get away with.
For the former rate, the Fed could in principle go as low as -1.3 percent, Britain down to -2.5 percent, the euro zone to -4.5 percent and Japan to -3.45 percent, economists Malcolm Barr, Bruce Kasman and David Mackie wrote in a note published late on Tuesday.
In answering to the title question, part of the surprise was due to BoJ Governor Kuroda-san’s volte-face.
Q How do negative interest rates work? But whatever the potential trigger, negative rates are becoming widely accepted throughout the world and are a possibility here in the UK.
The won-yen exchange rate hit a two-year high, fueled by a series of fear factors. For commercial banks, a small interest charge on electronic deposits has proved to be bearable compared with the costs of safely storing stacks of cash-and not yet onerous enough to try to pass on to individual depositors. After all, if a bank can earn a return (any positive return) by lending the money to regular people, whether to buy a home or start a business, they’re going to earn a considerably more handsome return than if they just kept that locked up at the Central Bank, now earning a negative deposit rate (getting charged money, not earning it). This would undoubtedly introduce unintended consequences as the Bank is sure to misallocate capital-as any government or central bank in the same position would. But it takes more than creative monetary policy to restore economic dynamism, and for Japan, it will take deep reforms to address its long-running structural issues. The BOJ needs to make a convincingly bold move now. This basically hasn’t happened, despite the BoJ now buying ~100%+ of JGB net issuance and amassing holdings equaling one-third of the entire JGB market.
The bank says yen strength will force the central bank’s hand as the stronger currency is a threat to its 2% inflation target.
More or less unnoticed is the BoJ’s equity ETF purchasing. Prices of Fed Fund futures, used to predict future policy decisions by the U.S. Federal Reserve, surged across the board as investors further cut back expectations that the central bank can engineer another rate hike soon. While the Rudd government handed bn straight to households, other countries’ attempts at fiscal stimulus were dogged by already wide budget deficits, relative high levels of government debt and political considerations. More specifically, that the large, negative “real” rates have not helped to spur capital expenditures nor the demand for loans substantially. An added twist to this sorry situation is the propensity for unprofitable businesses to continue to operate, inexorably dragging down productivity. I call it currency skirmishes.
10-year JGB yields nudged into negative territory this week whilst the 40-year maturity has been up from 1.12% to 1.23% over the past seven sessions. JGB futures offer a reasonably clean way of participating in any upside whilst hedging the majority of your currency exposure in either direction.