MONETARY POLICIES
only pay negative rates on new bank reserves resulting from its programme of asset purchases. All existing bank reserves - which amount to about $2.5 trillion or 50% of gross domestic product - will continue to be paid interest at 0.1%.
European Central Bank
The Eurozone has three key interest rates - one of which is the key deposit rate. The key deposit rate is at -0.4% which applies to commercial banks that make overnight deposits with the European Central Bank. The Eurozone’s main interest rate has also been cut to zero from 0.05%; that’s in addition to the European Central Bank extending its quantitative easing programme.
Swiss National Bank
In Switzerland the interest rate (key deposit rate) is -0.75%. Since December 2014, sight deposits above the threshold of around ₣320 billion are ‘punished’ with negative rates.
Central banks - running out of tools?
It’s too early to say wi th any certainty whether the negative interest rates decisions that have be en made by the
aforementioned centra l banks will spark economic g rowth over the long - term. However, it’s
fa ir to say
that these central banks are close to exhausted all of their options to boost growth.
If
these measures fail in their objectives, what else can the central banks actually do? This is especially true for Japan and the Eurozone in particular, both of which have also adopted strong quantitative easing programmes.
Traders must also consider the potential drawbacks of negative interest rates to economies. Negative interest rates are implemented to encourage borrowing by reducing the cost to access capital. However, negative key deposit rates (the charges applied to commercial banks for holding their reserves with central banks) could be passed onto customers. Should commercial banks
ask their customers to
pay a fee to deposit cash with them, that could deter people from using banks altogether. The problem here is that commercial banks could experience a shortfall in the capital they have available - making it even more difficult for them to fund loans and mortgages.
Should commercial banks to
FX
choose not to pass neg ative interest rates onto their cus tomers, there’s also reser vat ions about the impact that could have on their long term profit marg ins - which again acts as a disincentive to increase lending levels .
In my own view, central banks are close to limit in terms of using their full arsena l of monetary pol icy levers . Neg ative interest rates can be seen as the last roll of the dice to kicks tart the rate of growth.
Traders should closely monitor developments of the
aforementioned central
banks in the coming months, making a note on whether ke y e conomic data is improving f rom previous quar ters. Prolonged negative interest rates will continue to drag of respective currencies - but what is of key impor tance is whether the policy actually stimulates meaning ful growth, which remains to be seen.
Jarratt Davis
FX trade r, Funds Manage r and Mentor
Author of
How to Trade a Currenc y Fund
FX TRADER MAGAZINE April - June 2016 15
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