For Deutsche Bank’s George Saravelos, the Bank of Japan has decided: there is no zero lower bound.
On Friday, the Bank of Japan took interest rates into negative territory, applying a 0.1% charge to certain reserve balances held at the bank by commercial institutions.
Now, as it currently stands, there are almost no reserves eligible for this tax and its likely there won’t be large amounts of cash to which this rule applies in the near future.
But the move by the BoJ ends, for Saravelos, any discussion about whether the negative rate policies we’ve seen from central banks in Europe over the last couple years are merely a stunt or a new frontier for monetary policy.
“Our most important takeaway from today’s BoJ announcement is that there is effectively no lower bound to global policy rates — central banks can cut rates much, much more if they desire to do so, ” Saravelos writes.
Saravelos adds (emphasis ours):
The conclusion does not stem from the current level of BoJ rates itself; we are only at -10bps. Instead, it is the design of the system that matters. By creating dynamic and highly flexible liquidity exemption thresholds, the financial system is being shielded from the cost of negative rates. Switzerland already introduced this more than a year ago. But the BoJ design affords even more flexibility as well as incorporating a mechanism that prevents banks from hoarding liquidity in banknotes. Money market and government bond yields are not determined by the size of the exemption thresholds, but by the marginal amount of excess liquidity in the system. Provided this is charged at negative rates, rates can be pushed as deep as required.
Beyond that, the BoJ has not only demonstrated that there is no lower bound, but also signalled that negative rates are now mainstream policy […] In sum, the BoJ provides the strongest signal to date that the previously assumed zero lower bound on rates is no longer valid. Markets should now be pricing that global rates across global fixed income can sustainably and substantially trade below zero in the current (and future) easing cycles.
Now, again, this negative rate (which is effectively a tax) will only apply to a small slice of cash parked at the BoJ and the implications for the real economy will be limited insofar as they impact actual lending rates from Japanese commercial banks.
(Said another way, we’re a very long way away from you, a normal person depositing money at a bank, from being formally charged a rate of interest for keeping money there. Of course, in a way, negative rates or something similar have been in place at regular banks because there are things like ATM fees, service fees, and so on that tax your money. But either way.)
The existence of negative rates, however, could potentially push down interest rates in financial markets, a dynamic which would likely have an impact on real-economy lending activity or, at the very least, bank profitability.
But the most important takeaway is that a thing observers may have at one time considered impossible — charging depositors to keep money at a bank — is now a very real part of our financial world.
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