The view among investors is that negative interest rates and quantitative easing are increasingly becoming ineffective and costly
Tony Ward is chief executive of Clayton Euro Risk
A report showing the crippling effects of negative interest rates is due to be published later this week. Analysts expect the European Banking Federation to state that a 0.4% charge on deposits is costing banks billions of euros each year. That’s hardly surprising; it seems that everyone is finally recognising that negative interest rates are not a good thing for our economy right now. Everyone except the banks.
In January, the Bank of Japan shocked the markets by cutting its interest rates into negative territory. Sweden pushed its rates deeper into negative territory, too, in February while the European Central Bank ramped up its easing measures in March. “At the start [of the crisis] central banks around the world slashed their interest rates to zero, then they embarked on quantitative easing,” commented Alistair Hewitt, head of market intelligence at the World Gold Council. “The world hadn't seen negative rates before. And it's expanded significantly over the past two years. Investors are now asking how these moves are going to affect a whole range of asset classes and the banking system.”
Why is Mr Hewitt getting involved in this debate? Because of a recent change in investors’ behaviour. Buyers snapped up gold at a record pace in the first quarter of 2016. Demand for gold climbed by 21% to 1,290 tonnes in that period compared with the previous year. This represents the biggest first quarter increase since records began in 2000. According to Mr Hewitt, investors ploughed money into gold as central banks ventured further into negative territory on interest rates. “Investors are questioning the ability of central banks to have a significant impact on the global economy,” he said.
This chimes neatly with a blog I wrote back in April warning that a continuing descent into negative interest rates only serve to make investors nervous about bank earnings. This anxiety, in turn, would be reflected in lower share prices.
More than anything, the market craves certainty, but right now that’s being undermined by a good deal of apprehension. The view among investors is that negative interest rates and quantitative easing are increasingly becoming ineffective and costly. Central Banks think they can influence and control markets when in reality if markets want to move in the other direction they will.
Last week, two senior executives at Swiss bank UBS blasted the use of negative rates in Switzerland, Europe and Japan and argued that this central bank tool should be used only in ‘extraordinary times’. UBS chairman Alex Weber said: “We can only hope that the times of such dramatic measures by central banks pass as quickly as possible.”
Whatever the outcome of the EU referendum, and the uncertainties that come on the back of it, I hope Mark Carney, governor of the Bank of England, sticks to his guns. He has stated that the use of negative rates is unlikely to be a policy to which the UK would subscribe.
Very sensible in my view.
