Renewed Controversy Over Negative Interest Rates... Are the Effects Significant or Are the Side Effects Greater?

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] The novel coronavirus infection (COVID-19) has reignited the debate over negative interest rates. Although Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), has ruled out the possibility of introducing negative interest rates, the market still expects that it could be considered if the situation worsens. Opinions are sharply divided between those who believe negative interest rates have tangible economic effects and those who argue that the side effects are greater, keeping the controversy over their effectiveness ongoing.

On the 12th (local time), U.S. President Donald Trump tweeted that "while other countries benefit from negative interest rates, the U.S. should also accept the gift," advocating for lowering the benchmark interest rate into negative territory. In response, Chairman Powell stated on the 13th that "the Fed's view has not changed" regarding negative interest rates, adding, "Opinions on its effectiveness are divided. It is not a measure we are considering."

The negative interest rate policy involves lowering the central bank's benchmark interest rate below zero, a key monetary policy tool. Under this policy, banks charge customers for deposits and pay interest when lending money. Theoretically, this makes it more advantageous to use money rather than keep it in the bank. Currently, countries implementing negative interest rate policies include the European Central Bank (ECB), Japan, Switzerland, and Denmark. Recently, the Reserve Bank of New Zealand hinted at the possibility of adopting negative interest rates due to economic difficulties caused by the COVID-19 crisis.

The problem is that there is still no evidence that this policy is effective. The ECB was the first to introduce it in 2014, followed by Japan, but neither economy showed significant recovery. Inflation has remained low, and there is no proof that funds are actively circulating in the market through increased consumption and investment.

Moreover, concerns have been raised that the policy significantly reduces banks' interest income from lending, causing financial system instability due to deteriorating profitability. Some argue that banks might raise lending rates rather than lower deposit rates to maintain their interest margins, which could negatively impact the real economy. Additionally, there are views that short-term money markets could become unstable due to declining yields.

In response, Sweden's central bank, the Riksbank, which introduced negative interest rates in 2015, was the first to halt the experiment last December, raising its policy rate from -0.25% to 0%. The Riksbank pointed out that after introducing negative rates, side effects such as a significant increase in debt and capital flowing into real estate outweighed economic growth and inflation. Recently, Riksbank Governor Stefan Ingves also noted that lowering interest rates is not an appropriate response to the COVID-19 crisis.

As the debate over negative interest rate policies resumes, the Fed's decision on whether to adopt them is expected to remain a key market focus for the time being. Despite Chairman Powell's response, the market has not ruled out the possibility of the Fed introducing negative interest rates. Jacques Pandel, Co-Head of Global Foreign Exchange Markets at investment bank Goldman Sachs, predicted that the Fed would consider it if a second wave of COVID-19 infections spreads in the U.S. He said, "If the economy really struggles for a certain period, policymakers will want to try something new," adding, "In such a situation, they (the Fed) could consider it (negative interest rates)."

However, Pandel also noted, "Even in that situation, fiscal policy would take priority," and warned that even if negative interest rates were adopted, "they would not be helpful."

This content was produced with the assistance of AI translation services.