Page 17 - ISQ October 2020

INVESTMENT STRATEGY QUARTERLY

Negative interest rates: desirable or likely?

Chris Bailey, European Strategist, Raymond James Investment Services Ltd.*

“ Always turn a negative situation

into a positive situation ” – Michael Jordan

Negative interest rates provide an obvious challenge for the To understand why this might be, a little bit of economic
financial system as even a mild introduction of the concept of theory combined with business practicality can go a long way.
borrowers being paid on their lending balances or depositors The way lower interest rates can stimulate an economy is
being charged for maintaining money in the bank, appears to pretty straightforward to see as lowered interest costs for bor-
completely invert norms. With the Bank of England publicly rowers and reduced discount rate hurdles for investors,
flirting with the idea, are negative interest rates in the UK stimulate activity. Part of this transmission mechanism is the
either desirable or likely? banking system itself with the money multiplier impact (how
an initial deposit can lead to a bigger final increase in the total
Negative interest rates reflect an outer boundary of monetary money supply) being boosted by the aforementioned lower
policy, even more extreme than quantitative easing (QE) or interest rates. And clearly the reverse is true for higher interest
other policies centred on the extreme printing of money, rates.
which have periodically blighted national treasuries since
Roman times. They have been embraced by the Bank of Japan So why should negative interest rates not be just an extremely
and more famously by the European Central Bank (ECB), with loose and stimulating version of the above? Well broadly
the latter justifying them as part of their ‘whatever it takes’ speaking the above rests on borrowers, lenders and investors
toolkit to help boost the regional economy. However, six acting in a theoretically logical manner. However, all these
years after their implementation by the then ECB President groups are impacted by broader psychological factors too.
Mario Draghi, Eurozone economic activity and inflation levels Just as an ordinary person may regard something as ‘too
remain muted even with the juxtaposed application of QE and good to be true’, extremely low or negative interest rates can
other policy measures. induce a similar reaction.

As a policy instrument, negative interest rates do not appear A quote often attributed to the great economist John Maynard
to be any form of an economic panacea. Keynes was that using monetary policy to fight a severe reces-
sion is like ‘pushing on a piece of string’. Even before the
impacts of the pandemic, both Japan and the Eurozone had
faced a lengthy period of suppressed growth and lowered pro-
As a policy instrument, negative interest
rates do not appear to be any form of an pensity of economic actors to act in a dynamic and
economic panacea. risk-embracing fashion. This backdrop meant that negative
interest rates were doomed not to have the impact policy-
makers would hope. Ironically instead of depositors shying

*An affiliate of Raymond James & Associates, Inc., and Raymond James Financial Services, Inc.

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