Enter the Currency Wars
The most pronounced effect of negative interest rates measure is to suppress currency exchange rates.In order to curb the capital inflows that inflated the Danish Crone, the Bank of Denmark set their deposit rate to negative in July 2012. The large influx of money undermined their efforts to keep the Crone pegged to the Euro.
The ECB's Mandate
All of Mario Draghi's actions need to respect the ECB's principal mission. This is to keep inflation near 2%. Since the Eurozone faces a deflationary threat, drastic measures seem necessary and justified. The debasement of the Euro might stimulate possible drivers to inflation, but this is far from certain. This experiment may also backfire...European citizens may already prepare for even lower interest on our savings. It is up to all actors within the Eurozone if riskier assets are preferred over low yielding savings deposits.
Problable Effects
So what does history tell us?- Lower interest rates will be only partially passed through to consumers and to a larger extend to corporate deposits and/or service fees.
- Negative interest rates prove to directly affect currency exchange rates.
- Chances for a credit crunch are as big (or slim) as changes for increased money flow.
- Government and asset backed bonds interest rates may decline.
Whatever the ECB is orchestrating, it's (un)intended effects are still to be seen.
"It is an axiom of central banking that the banking system itself cannot reduce the aggregate amount of its central bank deposits no matter how many loans are made because the funds loaned by one bank eventually are redeposited at another. Is it reasonable for the central bank to impose a tax on deposits held at the central bank when the central bank itself determines the amount of such deposits held by banks and the banking system? Perhaps these and other considerations caused European Central Bank President Mario Draghi in a recent press conference to label negative deposit rates "uncharted waters" and dismiss any possibility that the ECB would consider it."
- St. Louis Fed, januari 2013
Sources:
http://www.bankofengland.co.uk/research/Documents/ccbs/cew2013/presentation_lynggard.pdf
http://research.nordeamarkets.com/en/files/negative-rates-April13.pdf
http://www.stlouisfed.org/publications/re/articles/?id=2316
No comments:
Post a Comment