FX MONETARY POLICIES
decisions from major central banks can cause significant market movements - simply because interest rates are an
indicator
of the health of an economy. For the best part of the last decade, interest rates have been close to zero across the major e c o no m ies to encourage consumers and businesses to borrow money (mo r tg a g es and loans) and
spend to
boost economic growth. This has been a response to the global financial crisis
of 2008,
where the global economy was subject to a substantial slowdown.
businesses.
At the time of writing, negative interest rates are in place in five major economies: Japan,
earn 0.10%. However, reserves above a certain threshold that commercial banks keep at the central bank receive zero interest. Then above the second threshold, the c o mme r cia l bank will have to pay the central bank 0.10% (i.e. -0.10% interest rate) to hold the reserves.
Traders must consider the potential
drawbacks of negative interest rates to economies
Negative interest rates are a further extreme of this kind of thinking, where central banks will
actually charge
Switzerland, Eurozone, Sweden and Denmark. Let’s take a look at some examples.
commercial Bank of Japan
banks for holding reserves with them (also known as a key deposit rate). The intended effect here is to make commercial banks lend more
to consumers and 14 FX TRADER MAGAZINE April - June 2016
In Japan, the interest rate is -0.10% but this is on a tiered system. The three-tier system means that basic balances still
The negative in t e r e st rate applies to current accounts held by financial firms at the central bank as a
three
part of tier
rate system. Approximately ¥10 trillion to ¥30 trillion of
the ¥250 trillion currently held in these accounts are subject to the -0.1% rate.
The three-tier system makes the move somewhat weaker than comparable actions by the European Central Bank and other European central banks. The Bank of Japan will
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