August 05, 2016
In the aftermath of the European debt crisis and the United Kingdom’s decision to leave the eurozone, several of Europe’s central banking systems have cut key interest rates to below zero.
Robert Haworth, Senior Investment Strategist for U.S. Bank Wealth Management, and Jennifer Vail, Head of Fixed Income Research for U.S. Bank Wealth Management, discuss the consequences of such moves and how they could affect the United States.
What are negative interest rates? How do they work?
HAWORTH: Negative interest rates are interest rates that are below zero.
Instead of earning interest on money deposited with banks, depositors are charged to keep their money in the bank.
Central banking systems in Europe and Japan have cut deposit rates to below zero in the hope that this will encourage banks to lend more to each other, businesses and consumers and therefore boost the broader economy.
Negative interest rate policies’ goals include: inflation control, looser lending and economic growth. In what ways have they been successful?
VAIL: The efficacy of negative rates as a whole is still in question. For the most part, they’ve had the opposite of the intended effect. That’s why many central banks are reluctant to use them.
HAWORTH: That’s clearly been the case in Japan and Europe. It looks like it worked OK with small countries like Switzerland, but even there it seems as though limits are being reached. Success has not really been applicable to other economies