Turning a negative into a positive?
25 Feb 2016

By Andy Golding

No-one could have failed to notice that the road to recovery from the global financial crisis is arduous and often confusing. What should governments and financial institutions be doing to ensure as quick a recovery as possible?

An emerging topic at the moment is that of negative interest rates. This month the Bank of Japan levied negative interest rates against high street banks, meaning that instead of accruing interest on the funds they park with the central bank, banks are actually charged for the privilege of storing their money. The theory is that banks will be more likely to lend funds to businesses and consumers as opposed to actively choosing to be penalised for saving money. This should lead to a much-needed injection of spending which could be expected to boost an ailing economy and generate a rise in inflation.

This is not a new idea from the Bank of Japan. Negative interest rates were introduced in Switzerland last year in an attempt to cap the increasing rise in their currency, the franc. The franc had gained in strength during the financial crisis when Switzerland became a stable market to invest in as it sat outside the embattled Eurozone. Denmark also adopted this method in a bid to cap the rise in its currency.

While the general consensus is that this method has worked for Switzerland and Denmark as their key objective was to lower the value of their currency, the jury is still out on whether Japan’s actions will achieve their objectives of stimulating spending and inflation. Early indications seem to be that the global financial markets are unconvinced by the Bank of Japan’s plan. With the markets already nervous due to declining oil prices, the economic slowdown in China and the ongoing financial crisis, has Japan’s biggest failure been its timing in implementing this new policy?

What of the UK? Could negative interest rates be looming on the horizon for us? Speaking last year, Andrew Haldane, Chief Economist at the Bank of England, went even further and suggested that to avoid ‘zero lower bound’ (ZLB - the theory that interest rates should not be lower than zero) paper currency should be eliminated and replaced with a government-backed digital currency: “it would allow negative interest rates to be levied on currency easily and speedily, so relaxing the ZLB constraint”. Haldane’s proposal contradicted the official word coming from Mark Carney, Governor of the Bank of England, regarding a rate rise. However last month Carney admitted his prediction had stalled.

Do negative interest rates lead to positive economic outcomes? It is too early to say but it is definitely an area of interest and I for one will be following the continued debate.