Negative interest rate policy - an unconventional gambit once only considered by...
TOKYO/WELLINGTON - Negative interest rate policy - an unconventional gambit once only considered by economies with chronically low inflation such as Europe and Japan - is becoming a more attractive option for some other central banks to counter unwelcome currency rises.
The Reserve Bank of New Zealand - considered a pioneer in central bank policymaking circles since it adopted inflation-targeting nearly three decades ago - floated the possibility of negative rates last week as it, too, slashed rates by a bigger-than-expected 50 basis points and sent its currency tumbling to 3-1/2-year lows.
That, in turn, has stoked fears of a cycle of competitive devaluations and prompted some policymakers to think about more radical tools. But trade tensions and volatile markets are forcing some Asian economies, particularly those reliant on trade, to look at ways to keep a spike in their currencies from hurting exports.
But the Bank of Japan’s experience paints a different picture. The yen-weakening effect of its announcement was short-lived. In just five months, the yen rose nearly 20% against the dollar.In the euro-zone, average corporate borrowing costs slipped to 1.6% in June from 2.8% at the time the ECB adopted negative rates in June 2014. Although economic growth initially boomed, it is now close to stagnating, having increased just 0.2% quarter-on-quarter in April-June.
The damage has been pronounced in Japan, where commercial banks have made little progress diversifying businesses beyond traditional lending. Intense competition in the overcrowded industry has forced many banks to lend at near-zero rates.
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