Long Live the Era of Zero, Negative Interest Rates
Strategists at Barclays last recently stated that there are possibilities of the era of zero/negative interest rates to last for more years to come. The era of zero or negative interest rates is most prominent in Japan as well as at a few places that fall under the Euro Zone. The situation has just worsened with the passage of time in view of the given crumbling growth of the economy and persistent rise in inflation rates.
While Japan and the euro zone areas will face a downward pressure on interest rates, the U.S. and U.K. economies, at the same time, will enjoy greater flexibility in terms of interest rates. However, they are expected to rise at a quicker pace as compared to others.
“Negative nominal interest rates are more than just a passing monetary fad,” Barclays mentioned in its 61st annual Equity Gilt Study.
The company further brought to light how the natural rate of interest across the developed world, is actually lower than where nominal rates are standing today. This given state is nothing but a product influenced by factors like the given economy’s growth and inflation rates.
Several studies recently came to the conclusion that the actual equilibrium policy rates are nearly zero all through the developed countries of the world. They need to fall below zero in the Eurozone and Japan, so that the interest rate policies can become sound and feasible.
Michael Gapen – the bank’s chief U.S. Economist and Co – author of the report is of the view that one of the standalone ways to prevent the situation from getting out of hand is by restructuring “zombie” banks and firms in order to allow private sectors the flexibility to start from scratch and get itself in shape to start growing again. Although the Euro zone may face problems in making this happen, especially given their slow growth rates, low inflation and the broken banking system, but it is not impossible.
“The era of low or even negative interest rates across the developed world, particularly in Japan and the euro zone, could last for several years to come,” Gapen said.
If we speak about Japan, rates have been restricted to a certain number since 1995 wherein the Bank of Japan had lowered its main interest rate to 0.5 percent to reflate the dying economy. What’s more? Bank of Japan has, since then, injected trillions of yen worth of stimulus via quantitative easing bond purchases. Today, BOJ can be seen struggling through deflation and low growth rates.
Head of economics research at Barclays and also a coauthor of the study, Christian Keller said that we don’t want to do ‘Japanification’ of the world. But accommodative policy aims to be staying here for long. Adding more to the points he mentioned that prior to our reach to the limits of these policies, central banks will be persisting with zero and negative rates.
The Federal Reserve policies will remain the same. Janet Yellen, Fed chair, was even recorded rubbishing away all the questions regarding the negative rates at the Congressional hearing last month.