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CHART: Nothing ever changes, even negative interest rates work via "the housing channel"

ALMERIA, SPAIN – APRIL 04: Unfinished houses stand amid recently finished ones in the newly contructed Viator suburb on April 4, 2009 in the coastal town of Almeria, southeast Spain. Before the real estate bubble burst, Almeria and it’s province where booming. During the recent downturn in Spain’s economy, regions which are heavily dependent on residential construction and real estate have seen unemployment levels soar. The province of Almeria currently has one of Spain’s highest unemployment rates at almost 25 per cent against a nationwide figure of around 13.9 percent. (Photo by Jasper Juinen/Getty Images)

There is currently a huge debate in markets about the efficacy of the push by central banks into negative interest rate territory as they try to revive their ailing economies and support markets.

Last week the ECB took the deposit rate further into negative territory moving the rate from -0.3% to -0.4%. In late January, the Bank of Japan stunned markets becoming just the 5th central bank to announce a negative official interest rate.

But markets are unconvinced as the rally in the Yen and strength in the Euro highlights. Just last week, first deputy managing director of the IMF David Lipton reinforced trader thoughts on the limited impact of negative rates.

“With negative policy rates taking hold in some countries, the scope for monetary policy to boost domestic demand further is limited,” he said.

But in its latest Global Macro Outlook, Macquarie research points out that negative interest rate policy, NIRP, is working the way monetary policy around the developed world has for decades. That is, central banks are using it to stimulate housing markets and in turn get consumers to spend some part of their increasing wealth.

Macquarie’s global team of analysts, who prepared the report, said “Monetary policy is working through the housing price channel.”

Sweden, which recently cut rates by 0.15% to -0.50%, and Switzerland which moved its target range from -0.75/-0.25% to -1.25%/-0.25% are both further down the negative interest rate path than their peers. They also have house price surges (Sweden in particular) that are sharper and which have taken a firmer hold than other NIRP nations.

The idea is that in time, if consumers aren’t tapped out, the increasing wealth could see consumption rise which will aid economic growth, help close the output gap, and perhaps get inflation closer to the 2% target many central banks have in their sights.

But this focus on housing also shows the market might be right and central banks may be out of ideas. Sweden’s housing bubble seems a most dangerous central bank experiment.

Perhaps as the IMF’s Lipton said last week, the time for governments to use fiscal policy is again upon the economies of the developed world.

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