What should we think about negative interest rates? What kind of Alice-in-Wonderland world are we living in when companies and households are paid to borrow and charged if they save?
Seemingly crazy, negative interest rates are spreading nonetheless. Implemented by central banks in Europe, Japan and elsewhere, they now apply in countries accounting for a quarter of the global economy. Should we be worried? Could we see negative rates in Britain?
Mario Draghi is being hailed, once again, as a rhetorical wizard. The president of the European Central Bank has done it again. After the October meeting of the ECB’s Governing Council, Draghi dropped hints the Frankfurt-based bank would soon be unleashing yet more quantitative easing across the Eurozone, further lowering interest rates, or both.
No matter that the ECB has been churning out €60bn of virtually printed money a month since March and is committed to do so until September 2016. That’s a Euro-QE programme of €1,100bn – an astonishing 8% of the Eurozone’s annual GDP. No matter, also, that the ECB’s benchmark interest rate is 0.05%, with the central bank deposit rate at minus 0.2% – both record lows – or that Draghi has previously said such rates were at “their lower bound”. The ECB is now “vigilant” – a trigger word previously pointing to imminent policy action.
What are we to make of Beijing’s shock devaluation? With the UK media classes fixated on Jeremy Corbyn, a potential Labour leader even his supporters acknowledge won’t ever be Prime Minister, you may not have clocked recent events in the People’s Republic. The actions of the Central Bank of China, though, and the near-term path of the yuan, could have a big impact on UK living standards.
Having grown 9.8pc a year since the late-1970s, the Chinese economy now outstrips America on a purchasing power parity basis (adjusted for living standards). With the big Western economies still shaky, if this Eastern giant stalls, the UK’s nascent recovery could easily reverse. And if Chinese stocks and bonds crash, with “contagion” spreading to financial markets elsewhere, that would upend British politics.
Global currency markets made front-page headlines last week, as the euro plunged towards parity with a surging dollar, and the pound similarly soared against the single currency. But why is the dollar so buoyant and the euro spiralling downward? And should you lock-in the strong pound by buying your summer holiday money now? You may, quite reasonably, think that economic fundamentals such as GDP growth and cross-border trade flows still drive exchange rates. Unfortunately, though, you’d be wrong. For we live in the age of “extraordinary monetary measures” and “central bank diktat”.
That may sound like a remote, jargon-laced statement, the musings of a nerdy economist. I’d say, in response, that the recent actions of Western central bankers are provoking not only heightened market volatility, but also increasing international conflict and the looming prospect of another Lehman-style systemic lurch. The dangers, sadly, are very real.