Page 18 - ISQ October 2020

INVESTMENT STRATEGY QUARTERLY

away from putting their savings in the bank, deposits in coun- tary policy fireworks. From my perspective such a policy shift
tries including Japan and Germany went sharply up. This was would be difficult to justify given recent practical experiences
also influenced by banks deciding that a generalised policy of from akin central banks. Far better to augment the quantum
charging depositors for maintaining a positive balance would of quantitative easing support, continue with aspects of gov-
have been foolhardy. Even with interest rates on mortgages ernment-led fiscal policy boosts along with an overarching
and other financial products pulled down to negligible levels range of productivity and dynamism enhancing supply-side
by the negative interest rate backdrop, many individual or measures to boost national competitiveness, confidence and
corporate borrowers were reluctant to overtly borrow more entrepreneurial spirit.
given the difficulties they were seeing in their day-to-day eco-
nomic lives over previous years. And caught between paying Mathematically two negatives do make a positive but rather
out positive depositor rates and lowered lending rates (and than combining a cautious backdrop with negative interest
relatively stagnant lending volume growth), the banking rates, encouraging positive thinking and risk preferences
system could not offer up a strongly positive money multi- among consumer, industrialists and entrepreneurs is
plier. And naturally a weakened and defensive banking system undoubtedly smarter.
can create its own problems. Net result? A negative interest
rates policy has been far from as economically stimulating as KEY TAKEAWAYS:
hoped.
• Negative interest rates provide an obvious
And the broader financial system has been impacted too. challenge for the financial system but have
Fixed income investors have seen income levels substantially been implemented by the Bank of Japan and
dwindle (although the capital value of their bond holdings European Central Bank
have materially risen). Equity and investment banking mar-
kets have been buoyed by cheap money but such shifts can be • They can struggle with the ‘too good to be true’
laid at the door of QE per se than negative interest rates. argument and induce strange responses from
economic actors
Some central banks have had enough. Many of the above rea-
sons were behind the Swedish Riksbank reversing their own • Practical examples show that a negative interest
policy of negative interest rates last year - and offer a cau- rates policy has been far from as economically
tionary perspective for the current ongoing discussions at the stimulating as hoped
Bank of England. Many commentators have cited the policy • Watch out for the 5 November Bank of England
th
announcement due on the 5th November as the point where policy announcement for more insights
negative interest rates could be formally embraced. Guy
Fawkes Day would seem appropriate timing for such mone-

Negative interest rates over time

February September November
The Swedish U.S. president Donald Bank of England
Riksbank cut its Trump calls on the Monetary Policy
repurchase rate into Federal Reserve to cut meeting could
negative territory for interest rates to 0 or introduce negative
2014 the first time 2016 below 2019 interest rates

January 2015 January 2019 December 2020
The European The Bank of Japan End of negative
Central Bank cut its introduces a interest rates in
deposit rate to -0.1% negative interest rate Sweden
for the first time

Source: Various Google searches by the author.

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