Negative interest rates are a threat to Europe's financial stability
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Negative interest rates erode the profitability of the banking sector and pose a threat to financial stability. In exchange, they offer an economic stimulus that is mild at best and that has actually been seen to backfire in some regions. The world economy is once again navigating in uncharted waters. Watch out for the reefs.
Central bankers are at it again. After having taken policy rates precipitously to zero following the global financial crisis of 2008 and experimented with the new instruments of quantitative easing and forward guidance, they are back in the lab. The new gadget is called negative interest rate policy, and it is emitting a distressing tick.
The first major central bank to take rates negative was the ECB. It lowered its deposit rate to -0.10% in June 2014, before doubling down – quite literally – the following September. Then came the Danmarks Nationalbank and the Swiss National Bank, followed by the Swedish Riksbank in February 2015. The last entry into the club was by the Bank of Japan in January 2016. The latest of these moves, on March 10th, saw the ECB cut its deposit rate by 10 basis points, bringing it to a historical low of -0.4%.
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