Generally speaking, folks can get used to anything and move forward. Banks, as well, can settle for a financial status quo and the effects are—surprisingly--far from financially earth shattering.
Despite months of squawking about negative interest rates effecting global economic stability, central banks across the globe seem to be adjusting to the situation.
The most talked about banking institution that has left rates at rock bottom is, of course, the Federal Reserve Bank in the U.S. The Fed has kept the interest rate zero for close to nine years—since 2007--and is only now nearing the time when it will introduce a hike of not more than a quarter of a point, practically insignificant by many economists’ standards.
Despite months of squawking about negative interest rates effecting global economic stability, central banks across the globe seem to be adjusting to the situation.
The Bank of England Governor Mark Carney, who up until now has taken a step back from introducing deeper rate cuts which he believed could shake up money markets, has come out and vocally acknowledged that a U.K. benchmark of 0.5 percent or even lower can indeed be tolerated.
European Central Bank President Mario Draghi is now ready to allow banks to leave money in his vaults overnight with a charge well into sub-zero territory. The ECB’s deposit rate currently stands at minus 0.2 percent and may be cut further next month.
Sweden and Switzerland have already proven that negative benchmark interest rates don’t necessarily result in banking pressure or flights to cash with Sweden’s key rate at minus 0.35 percent and Switzerland’s at minus 0.75 percent. Denmark's central bank cut its interest rates for the fourth time in three weeks in February of this year from minus 0.5 to minus 0.75 percent.
Stimulate a Weak Economy
From a bank’s perspective the motivation behind negative interest rates is to stimulate a weak economy by getting businesses to take loans and finance operations cheaply. One result of this effort is that the average consumer suffers from the low rate and is exposed to unwarranted risk in an effort to find better yields and returns from some other means.
According to former Fed Chairman Ben Bernanke, low interest rates can be explained partially by the rise and fall in the rate of inflation. When inflation is high, investors want higher yields “to compensate them for the declining purchasing power of the dollars with which they wish to be repaid.”
Reduced consumer savings also plays a part in keeping interest rates at their lowest. The aim of negative rates is to spur spending and lending by penalizing savers and banks sitting on cash. It also helps that they tend to weaken currencies.
Quantitative Easing (QE) introduced by global central banks in many different forms during a period of poor economic growth, has also been responsible for the clampdown on interest rates, and this too has added to additional risk tolerance.
At the end of the day, the Fed is the primary determinant of short-term interest rates. This is one of the monetary tools the Fed has at its disposal and Fed policy can also influence inflation and inflation expectations (allegedly) over the longer term (10-30 years). Much of what is undertaken by central banks around the world is based on the actions of the Federal Reserve.