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Negative rate moves ‘clear sign of desperation’

Negative rate moves ‘clear sign of desperation’

With 500 million people now living in countries which have adopted negative interest rate policies, a new report warned moving into sub-zero territory is a “clear sign of desperation”.

Negative rate policies have become a dominant tool of choice for central banks and governments trying to stimulate the growth of weak economies.

However, an in-depth study by S&P Global which looked at the impact of negative rates on regions like Europe and Japan, highlighted the potential economic damage which can come from enforcing these unprecedented policies.

The report said such measures are pushing asset managers into illiquid asset classes that are exposed to credit risk, such as high yield bonds, commercial real estate and private equity.

John Kingston, director of global market insights at S&P Global, pointed out that negative rates could damage bank profitability by discouraging deposit holding, which currently accounts for 85 per cent of bank funding requirements.

“Ultimately, low yields could lead to more risk-taking which can lead later to redemptions of higher-yield instruments,” he said, adding those redemptions may spill over into illiquid markets.

If negative interest rates spread to the wider economy, S&P said it can cause a shift towards a “cash-only economy”, which could lead to increased transaction costs and rising risks of theft.

S&P also said some money market funds are mitigating the impact of negative rates through “share cancellation” schemes, which effectively erode an investor’s principle sum.

Using Japan as an example, it said negative rates have not behaved as intended, and evidence suggests its success has been limited.

Mr Kingston said: “Negative interest rates were once considered by many economists as a radical strategy or even a mathematical impossibility, but some of the world’s most significant economies are now turning to negative interest rates to arouse moribund economies.

“However, moving to a negative rate environment, in every circumstance that we’ve looked at, is a clear sign of desperation with the list of potential economic damage from these policies substantial.”

katherine.denham@ft.com