Governments lower interest rates when economic growth slows. The theory goes that cutting interest rates encourages businesses to borrow for investment while encouraging people to spend rather than save money. Economic activity increases, generating jobs. International trade growth rises. Global economic growth returns to normal – whatever that is.
If low rates spur economic growth, then negative rates should really drive it. But as central banks around the world experiment with negative policy rates, the law of unintended consequences appears to be kicking in.
Financial journalist Frances Coppola, regularly featured in the Financial Times, The Economist, Forbes and a range of other financial industry publications, explores the theory and practice of negative interest rates in this five-part “master class.”
Part 1: Unexpected Ways Negative Interest Rates Influence Currency Exchange Rates
When central banks cut policy interest rates, currency exchange rates are supposed to fall. But despite persistently negative interest rates, the Swiss franc’s exchange rate remains elevated. And when Japanese policy makers introduced negative rates, the yen actually rose to 18-month highs against the U.S. dollar. Read Article
Part 2: Trying to Explain the Mysterious Relationship Between Negative Interest Rates and Global Trade
Interest rates are at historically low levels, making borrowing exceptionally cheap. Negative yields on safe assets such as government bonds push investors searching for yield into lending to riskier businesses. With all this help for borrowing, businesses should be expanding, people should be spending and global trade should be booming. Except it’s not: after a prolonged slump, global trade growth continues to be revised downward by the World Trade Organization. Read Article
Part 3: Negative Rates: Banks, Business Investment and Trade Finance
Despite historically low and even negative interest rates intended to drive up lending, global trade finance is becoming harder to find for many small- and medium-sized enterprises. This post explores how negative rates may be squeezing bank margins in a way that yields risk aversion and domestic-focused bank lending instead of the expected “reach for yield” of a negative-rate world. Read Article
Part 4: Negative Rates and Trade Finance: the Oil and Commodities Story
The example of oil and commodities shows how falling prices and negative rates may be squeezing bank profit margins in ways that could lead to long-term change in the nature of global trade finance. Read Article
Part 5: As Negative Rates Buffet International Businesses, Trying to Avoid Them May Bring About a Cashless World
Some people and businesses have begun hoarding physical cash to avoid negative rates. And the fact that negative rates can be avoided by substituting physical cash makes policymakers want to eliminate cash. Read Article
- “Unintended Consequences,” The Concise Encyclopedia of Economics of the Library of Economics and Liberty http://www.econlib.org/library/Enc/UnintendedConsequences.html