While most of the world’s central banks have been exhibiting an easing bias, Sweden’s Riksbank recently declared its intent to move away from negative interest rates by the end of the year.
It is planning to do so despite a weakening economic outlook: even the local central bank’s optimistic forecasts suggest below-trend growth and inflation, hardly the right environment to be raising interest rates.
Yet Sweden is not alone in resisting negative rates; the Reserve Bank of Australia (RBA) has also recently expressed scepticism on this topic. Governor Philip Lowe gave a speech last week offering greater clarity on where the RBA views the lower bound for rates and how it thinks about unconventional monetary policy.
There was a fairly clear assessment that the RBA sees the lower bound as 0.25%, so with rates currently at 0.75% there would be scope for only two more cuts.
Regarding the potential sequence of unconventional policies, the governor said that the RBA would only consider quantitative easing (QE) if both the policy rate was 0.25%, and if growth and inflation were clearly heading away from their targets in the medium term. If implemented, QE would be deployed in government bonds only, as the RBA doesn’t want to interfere in private markets that are functioning well.
Lowe, not that low
The open hostility towards negative interest rates was the most interesting element of the speech. Lowe’s comments were heavily drawn from a paper recently published by a group he chairs at the Bank for International Settlements (BIS), which covered different banks’ experiences of unconventional monetary policy.
Obviously every central bank has an interest in defending its own current policy – for example, the European Central Bank (ECB) produces work contending that negative rates have worked – but, even allowing for this, Lowe was much more negative than the BIS report to which he put his name.
There were several elements to Lowe’s dismissiveness. First, he claimed negative rates would strain bank profitability which could damage the credit channel, even though other papers from the BIS and ECB have disputed this.
Lowe also argued that sub-zero rates support ‘zombie firms’, and that they would create political tension if the government relied too heavily on the central bank to solve its problems. He warned too that they could lead to problems for pension funds with liabilities, and that they could catalyse a behavioural shift that might actually encourage more saving if sub-zero rates were negative for confidence.
Overall, Lowe said the threshold for undertaking QE in Australia had not been reached. “I don’t expect it to be reached in the near future,” he insisted, but it’s clear that he believes this only because he expects the Australian economy to turn a corner. If the data continue to deteriorate, the hurdle to QE doesn’t seem as high as Lowe suggests.
The RBA is fairly sanguine about recent data, wanting to wait to see the impact of the latest three rate cuts and recent tax cuts, but there has been precious little evidence that easier credit conditions have led to a notable pickup in domestic demand. I expect they will continue to be disappointed.
The exceptions, not the rule
Can we read anything from this into the development of central banks’ thinking globally about negative rates? We cannot ignore the fact that we’ve now had two central banks come out very explicitly against them.
However, in both Sweden and Australia, the concerns the local policymakers raised fall into one of two camps: a) a problem with low, not simply negative, rates; or b) a fear of the unknown.
I don’t think either of these issues will matter as much in the debates at the ECB or Bank of Japan, where the floor for interest rates has been set far lower.