Negative rates work best for smaller, open economies, economists say


A Bloomberg survey of 63 economists covering central banks in the euro area, Switzerland, Denmark, Sweden and now Japan has found that rates below zero are thought to work better in smaller, open economies dealing with foreign exchange challenges, rather than in larger ones hoping to boost growth or stem falling prices.

Ninety percent of economists gave the Danish Nationalbank a thumbs up, while 70 percent were bullish regarding the Swiss National Bank’s experience. The similarities between the two are clear; both are based in relatively open economies, and implemented negative rates to help manage their currencies.

The European Central Bank lowered its deposit rate below zero in 2014 as part of President Mario Draghi’s multipronged attempt to avoid deflation and boost lending. Inflation dipped below zero four times last year and policymakers say it will probably do so again in coming months. It is therefore understandable why three-fifths of economists rated the ECB’s policy as ineffective.

Sweden’s Riksbank joined the negative rate club last year as a way of jolting itself out of disinflation, but fared even worse than the ECB in the eyes of economists. Such pessimism did not stop it from further lowering its benchmark repo rate last week to minus 0.50 percent from minus 0.35 percent.

For the Bank of Japan, whose negative interest rate only came into effect this past week, economists were asked to provide a forward-looking assessment, and the resulting consensus was even more bleak. Just 27 percent said BOJ Gov. Haruhiko Kuroda’s surprise decision will ultimately help fight deflation or revive Japan’s stalled economy.

Economists said that central banks in Sweden and Denmark have already reached their rate floor, and see an additional 20 basis points in rate cuts from the ECB. That’s also how much more the Bank of Japan is expected to lower its policy-balance rate, translating to a low of minus 0.30 percent, according to the median estimate of economists.

The SNB stands apart in its willingness to go farther than any of its peers, and is expected to eventually impose a deposit rate of minus 1 percent. That would still leave it an extra 25 basis points of wiggle room, according to a separate Bloomberg survey, which determined the SNB can cut the rate to minus 1.25 percent if necessary.

All five banks are expected to remain in subzero territory until at least 2018, according to economists. Denmark’s Nationalbank will have lived with a negative interest rate for the longest at 5½ years over two stints, compared to about four years in the euro area and Switzerland, and about three years in Sweden and Japan.