Mark Carney said something yesterday that should cause angst among other European central banks: “I’m not a fan of negative interest rates. We’ve seen the consequences of them in other financial systems. We have other options to provide stimulus if more stimulus is needed so we don’t need to go to that resort.”
He added that he sees the effective lower bound of rates as “a positive number close to zero.”
Now imagine who was listening to those words — the bankers at the European Central Bank, the Swiss National Bank, the Swedish Riksbank, the Danish DNB and the Bank of Japan, all of whom have held interest rates negative in their own areas for prolonged periods.
Carney was being polite, diplomatic.
But his words are akin to saying, “I see what you’ve been doing — and it sucks.”
Carney may be on the right side of history. Until recently, zero interest rate policies were regarded as mere theoretical constructs, a kind of thought experiment taught in business school textbooks on the understanding that it would never actually occur. (I took a macroeconomics course taught by Prof. David Love at Columbia Business School a few years ago, and I remember him saying that, in theory, a bank could set negative rates — in which depositors are charged for saving their money — but that it wouldn’t happen in real life.)
Theoretically, negative rates pump money into the economy by penalising people for saving. Better to spend or invest it now than have it eaten by bank fees and interest penalties.
But the major new lesson in economics over the last few years is that the theoretical “zero bound” is actually a real boundary that banks cannot cross.
The reason is that low, zero and negative rates hurt banks’ profitability. So banks try to get their margins back by other means, and that usually means charging people more to borrow money. On paper, taking out a negative interest rate mortgage would mean the bank would pay you to take its money. Obviously, no bank would do that. But if the bank was being charged for storing cash at the central bank in a negative rate account, then it could offset those losses by only giving out mortgages with higher positive rates. That is exactly what happened in Switzerland, where mortgage rates went up as the SNB went negative.
Negative rates have other weird dysfunctions too, like encouraging cash hoarding and penalising people who store money electronically.
So Carney is saying he doesn’t like what he sees across the rest of Europe and in Japan, and the UK won’t be joining them in their negative experiment.
It’s a bold bet. If the UK economy recovers, then Carney will look like a genius. And all those other guys — Mario Draghi at the ECB, Thomas Jordan at the SNB, Stefan Ingves at the Riksbank in Sweden, and Lars Rhode in Denmark and Japan’s Haruhiko Kuroda — will not.