Negative Rates Bring Complications for Central Banks

By Unknown

Kamis, 16 Juni 2016

Negative Rates Bring Complications for Central Banks

In what may be a final act of desperation, the actual central banks abdicate control of savings they entrusted to manage. First there was zero interest rates, quantitative easing then, and now negative interest rates - a vain attempt begetting another. Like the first two gambits failed to gain significant ground in economic recoveries chronically low, switching to negative rates will only aggravate the risks of financial instability and prepare the ground for the next crisis.

The adoption negative interest rate - first launched in Europe in 2014 and now embraced in Japan - a major turning point for the central bank. Previously, the focus was on strengthening aggregate demand - mainly by lowering the cost of borrowing, but also by stimulating wealth effects of the appreciation of financial assets. But now, by imposing sanctions on excess reserves on deposit at the central bank, the negative interest rates drive stimulus through the supply side of the credit equation -. Indeed, urging banks to make new loans irrespective of the application of these funds

via Project Syndicate

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