In the face of rampant inflation brought on by Covid-19 and the Ukraine war, doubts linger over the strategy’s effectiveness and whether it will ever be used again
Europe’s decade-long experiment with negative interest rates, which ended on Thursday with the Swiss National Bank’s return to positive territory, shows one thing: they can exist beyond the realms of economic science fiction.
“I think that probably the bar is going to be higher in the future,” said Claudio Borio, head of the Monetary and Economic Department of the Basel-based Bank of International Settlements which acts as the bank to the worldRarely does monetary policy generate as much sound and fury as did the recourse in the early 2010s to negative rates by four European central banks and the Bank of Japan — now the only monetary authority still sticking with them.
Other side-effects are harder to pick apart. Fears of negative rates leading to money-hoarding proved largely unfounded: in Switzerland, for example, the number of 1,000-franc notes in circulation remained the same, suggesting customers were not withdrawing cash to store in a safe at home.s first negative rate mortgage, it is likely that cheap borrowing added steam to spikes in house prices across the region. But prices were often being squeezed higher by local factors, including tight supply.
“In the end, they worked the same as normal rate cuts,” said report co-author Gregory Claeys, while acknowledging the impact may have been greater had the experiment gone on for longer.Whether negative rates actually achieve their goals is harder to answer given the modest extent of the trial — no-one ever went lower than minus 0.75% — and that they have been swept aside by the turmoil of the past two years.