When European Central Bank Chief Mario Draghi added to the 619 rate cuts since the 2008 financial crisis last week, he told reporters it would be the last one.
Analysts at Citigroup aren’t so sure.
Draghi pushed the deposit rate — the rate at which lenders have to pay to keep money at the ECB — down to minus 0.4% in an effort to pull inflation up from below 0% to the 2% target.
It was another step down a path that central banks are walking down in increasingly finding there’s no way Negative rate policies have come to dominate central banks in developed countries.
Desperation is taking hold, according to Citi analysts (emphasis ours):
In our view, ongoing inflation undershoots and a continuing readiness of central banks to pursue currency weakening (or at least the avoidance of an appreciation) as an integral part of their pursuit of their inflation targets or dual mandates suggest that the recent trend towards (more) negative policy rates is
likely to continue.
Indeed, negative policy rates are likely to become a regular feature across many countries in coming years and we suspect that policy rates could fall further, perhaps significantly further, than our current forecasts suggest. Recent developments in financial markets and the greater risks to the global growth outlook raise the likelihood of more and deeper policy rate cuts across a range of countries.
So, what seemed like a flash in the pan, or at least a policy limited to a few countries with strong currencies such as Switzerland and Sweden, will now likely stay for years. This is particularly bad news for firms who depend on high-yielding assets to make money, such as some banks and most insurers. As the monetary easing continues, so the yields on low risk bonds will fall.
Here’s the chart from Deutsche Bank: