When central banks start exploring strange new worlds, the results aren’t always ideal.
Quantitative easing wasn’t just a change in monetary policy, but a whole new kind of monetary policy — a journey into the unknown. It isn’t over yet, but there’s already a debate about drawbacks and unintended consequences. With that question far from resolved, another adventure in super-loose monetary policy has begun: negative interest rates. This week, as global market plunged, unforeseen complications have arisen there too.
Shares in European banks suffered especially badly during this renewed market turmoil. There was more than one reason, but negative rates seem to be implicated. Banks’ deposits at the European Central Bank now pay minus 0.3 percent, and a further cut has been advertised for next month. The idea is to encourage banks to lend more (rather than sit on idle balances) and to lower the cost of capital for riskier borrowers. The new concern is that negative rates have squeezed banks’ profit and put their soundness in question. (Read more)