Negative interest rates: bankers at the IMF meeting weigh in

Reuters . Washington | Published at 12:00am on October 20, 2019


A file photo shows a sign outside the headquarters of JP Morgan Chase & Co in New York. — Reuters photo

One of the hot topics of discussion at the International Monetary Fund’s annual meeting was negative interest rates, which have been utilised by central banks in the euro zone and Japan to boost growth.

The ECB cut rates deeper into negative territory last month and said it would restart asset purchases, igniting a rare public debate as a growing number of policymakers question the value of its deep foray into unconventional monetary policy.

Meanwhile, the Bank of Japan was laying the groundwork for deepening negative interest rates, analysts polled by Reuters said, with two-thirds of respondents expecting the central bank to loosen monetary policy this month.

The moves have raised a debate about the ammunition other major central banks such as the US Federal Reserve have to fight a slowdown.

Here are some comments made in the past few days:

Morgan Stanley’s chief executive, James Gorman:

‘What Europe is experiencing with negative rates, obviously is really bad. Not just for the financial sector, but for the broader economy. Do I worry about them being too low? Listen, the Fed’s job is to manage the excesses and to prop up the weaknesses in any economic cycle. There’s no rulebook that Jay Powell’s got on his shelf behind saying at this point, with this information, you should do X. There’s a judgement call. I personally would be more cautious bringing US rates down because you are using up one of the tools that you have... At this point, I would probably price one more cut for the rest of the year, and then I would really sit back, watch and wait.’

JPMorgan Chase’s chief executive Jamie Dimon on lessons from the case in Europe:

‘I think this is a lesson. I think they did it early on to save Europe basically from coming apart with the monetary union. We don’t know. I think they’ll be writing books about this in 50 to 75 years.

‘Negative rates has huge negatives for savers and low-income people, for investors and for the capital markets. I, personally, would not buy debt below zero… There’s something irrational about it…I’m not sure the monetary rules are the same for a negative rate as they are for a positive one.’

Tobias Adrian, financial counsellor and director of the IMF’S Monetary and Capital Markets Department:

‘Remarkably, the amount of government and corporate bonds with negative yields has increased to about $15 trillion (11.6 trillion pounds). Moreover, markets expect about one-fifth of government bonds will have negative yields for at least three years. With rates staying lower for longer, financial conditions have eased, helping contain downside risks and support global growth for now. But loose financial conditions have encouraged investors to take more risks in a quest to achieve their return targets.’

Daniel Pinto, co-president and chief operating officer of JPMorgan Chase Investment Bank, speaking at The Institute of International Finance:

‘I think one of the problems with negative (interest) rates is that it tends to have less effect today than a few years ago.

‘Before this current interest rate environment, if rates were going to be so low for so long, we would have started to get worried about the future. But today, as the population gets older and their priorities change, the distribution of rate changes don’t affect the economy as much. For our business, we prefer high interest rates more than low interest rates, but in general, it doesn’t make much of a difference.’

‘In the insurance business and pension business, it makes more of a difference because they have certain liabilities that become more difficult to manage as rates go lower and lower.’

Ray Dalio, founder of global macro hedge fund Bridgewater Associates:

Dalio said that he was worried perpetually low or negative interest rates was creating a ‘crazy or odd’ reality in which debtors barely had to service their debt.

‘Interest rates become negative or near negative so the debt service payments for the interest rate are down a lot. And it’s almost a situation where there’s guaranteed debt rollover.’

Austrian central bank governor Robert Holzmann:

Holzmann, one of the newest members of the ECB’s policy panel, said that negative interest rates were not sustainable over the long term and some financial sector players simply could not adjust.

‘Insurance companies and pension funds have no way to neutralise the negative rates and it becomes impossible to provide the rates of return individuals expect,’ Holzmann said.

He argued that given low returns, insurers and pension funds must take on more risk, which could then endanger financial stability.

Holzmann also noted that ultra-low pension returns endanger European efforts to supplement a public pension system with a private pillar, another reason for the ECB to change its approach to negative rates.

Italian central bank chief Ignazio Visco:

‘Being very unconventional, I think we have to be very careful of the possible negative effects of negative rates,’ Visco told a conference on the sidelines of the IMF and World Bank fall meetings. ‘I would be very, very careful in going further in this direction.’

Reserve Bank of Australia governor Philip Lowe:

Lowe said that it was ‘extraordinarily unlikely’ that negative interest rates would be implemented to meet the country’s inflation and growth targets, adding that low rates alone were unlikely to stimulate investment.

‘I’m not going to speculate on ... negative interest rates and quantitative easing in Australia, other than to say that negative interest rates are extraordinarily unlikely in my country,’ Lowe said during a presentation at the IMF and World Bank fall meetings in Washington.