Friday21 February 2020 ★ FINANCIAL TIMES 7

F T B I G R E A D. MONETARY POLICY

The Riksbank’s reversal of its negative interest rates policy is being heavily scrutinised by other central

banks worried about their potential lack of firepower should there be another downturn.

By Richard Milne and Martin Arnold

the money it holds for banks from nega-

tive rates, while also offering them loans

at sub-zerolevels to stimulate lending.

Among the big losers have been sav-

ers. With more than $13tn of bonds

trading at negative yields, a growing

number of pension funds, insurance

companies, and banks are struggling to

generate sufficient returns, raising

doubts oversomebusiness models.

Mr Ingvesacknowledgesthat Swedish

insurance companies are heavily

exposed to stock markets, unlike many

of their European rivals. While shares

have gone up, that has been good news.

“But if the stock market is down at some

time in the future, then risks are going

up, and that increases risk in the system

as a whole,” he adds.

Asset price bubbles

Isabel Schnabel, a German economist

whorecently joined the ECB board, says

that criticism of its monetary easing pol-

icies in her country “is all too often com-

bined with claims and accusations that

have no basis in fact”. While the average

German saver is €500 out of pocket

because of negative rates, Ms Schnabel

says an average borrower is €2,000 bet-

ter off and the overall gains outweigh

the losses,withBerlinsaving billionsof

euros on interest payments.

Another risk from negative rates is

thatthey inflateasset price bubbles,

while also keeping alivezombie compa-

niesthat without cheap money would

collapse. In Sweden, the big concern ash

been the housing market, with Mr

Ingvesrepeatedly issuing warnings

about record levels of household debt.

A series ofmeasuresto make mort-

gages harder to accesshave eased Swed-

ish fears. The Riksbank recently

changed its outlook on rates. Even when

they were innegative territory, italways

forecast increases. ButinDecember,

it said rates would remain at zero for

years until, n the words of Mr Ingves,i

“the fog lifts” and there is a clearer view

of theglobal economy.

Gabriel Blir, an estate agent in central

Stockholm, talks of the struggle he had

to sell a flat bought near the peak of the

market in 2016 forSKr4.5m. Two ear-

lier attempts failed when bids went no

higher than SKr4.2m but this month,

after the Riksbank’s comments on rates,

the flat wassnapped up for SKr4.45m

(€420,000). “When you hearthat inter-

est rates will stay low for years, it is a big

safety net for buyers,” he says.

Suchanxietiesfeed into the larger

debate over the efficacy of negative

rates. “There is an increasing realisation

that the negative side-effects of these

policies are becoming more appar-

ent ... while the benefits in terms of

raising inflation to central banks’ tar-

gets have not been achieved,” says

Danae Kyriakopoulou, chief economist

at central banking think-tank OMFIF.

Policymakers at the ECBseem com-

mitted to sub-zero rates in their quest to

lift inflation. “The overall macroeco-

nomic effect of unconventional meas-

ures remains positive... there may be

diminishing returns from negative

rates, though we are not yet close to the

reversal rate,” says Olli Rehn, head of

Finland’s central bank and a member of

the ECB governing council. “If needed,

we have capacity to cut further.”

Mr Ingves appears less sure of the use

of negative rates in the future. He

underscores that they could indeed go

below zero in Sweden again if the econ-

omy deteriorates, but he stresses that in

a sharp downturn additionalpolicies

would have to take more of the strain.

“I think there actually is a lower

bound for the policy rate,” he says, add-

ing that he finds it difficult to envisage a

rate of, say, minus 5 per cent. Instead he

arguesthe central bank would have to

use its balance sheet more. So too would

thegovernment, whosedebt is forecast

to fall to close to 30 per cent of GDP this

year,lowby European standards.

His comments echo those of Ms

Lagarde, who said in February: “Mone-

tary policy cannot, and should not, be

the only game in town”.

Central bankers areclosely monitor-

ing how Sweden fares in its move to zero

rates as the outlook for growth and

inflation both there and in the rest of the

world remains uncertain.

“We look forward to a day when we

can get out of negative rates,” says Philip

Lane, chief economist of the ECB. “At

some point, the comparison of benefits

and costs is going to change.. It is a lot.

easier to make that decision when infla-

tion is closer to 2 per cent, as in Sweden,

than when it is still too far away, as it is

here [in the eurozone].”

Why Sweden ditched its

sub-zero experiment

I

t is the biggest monetary policy

experiment of modern times. One

that has divided economists, cen-

tral bankers and politicians. But

now that Sweden has called a halt to

its five-year trial with negative interest

ratesthe serious work has begun on

looking at whether itworked.

Sweden’s Riksbank, the world’s oldest

central bank, was thefirst o take itst

main repurchase rate — at which com-

mercial banks can both borrow or

deposit money — negative in early 2015,

to fend off deflation, onlyreturning to

zero in December.

Theend of the Swedish experiment si

being watched with intense fascination,

not just by those central banks that still

have negative rates, such as the Euro-

pean Central Bank and Bank of Japan,

but also by authorities and economists

worldwide pondering how to respond to

the nextdownturn withlimited ammu-

nition to stimulate the economy.

For many, it is still too early to

judgewhether negative rates have

worked r caused lastingo damage to the

economy and finance sector. But, Jakob

Carlsson, chief executive of Swedish life

insurer Lansforsakringar Liv, is in no

doubt. He calls sub-zero rates “a mis-

take”, arguing thatthey force people to

save more and spend less.“Sooner or

later, we will have to pay the bill for this

experiment of artificially created nega-

tive rates,” he says.

Eurozone banks say they have paid

€25bn in negative rates to the ECB since

it cut rates below zero in June 2014, eat-

ing into their already weak profits.

Other areas of finance have also felt the

strain —Dutch pension funds,only nar-

rowly avoided cutting payouts o pen-t

sioners last year after the government

intervened to loosenrules.

“The ECB, the US Federal Reserve and

the entire central bank community are

watching very closely what is happening

in Sweden, it is an interesting empirical

example,” says Guntram Wolff, director

of the Bruegel think-tank in Brussels.

“The real question is whether a change

in interest rates from negative to zero

has an impact on inflation and eco-

nomic growth.”

Topsy-turvy policymaking

Negative rates turn the principles of

finance on their head by forcing com-

mercial banks to pay to store money at

the central bank rather than earn inter-

est on it. At the same time, some coun-

tries and companies have been paid to

borrow. Most recently, someindividuals

across Europe have begun payingto

deposit large sums of money in banks,

whilemortgage borrowers in Denmark

have received money from their house

loans rather than having to pay interest.

The idea behind the topsy-turvy pol-

icy is to encourage banks to lend more

money instead of holdingit at the cen-

tral bank, thus stimulating the economy

by also lowering financing costs for

companies and households. Denmark,

the eurozone, Japan and Switzerland

still have negative rates but the evidence

on whether they work — and with what

side-effects — is still being collected.

The ECB, which last year cut its

deposit rate to a new low of minus 0.

per cent, argues that without its actions

the eurozone economy would today be

almost 3 per cent smaller and have 2m

fewer jobs. “Clearly everybody is going

to look at what conclusions are drawn

from that monetary policy reversal...

in Sweden, but I wouldn’t draw any con-

clusions as far as our policies are con-

cerned,”Christine Lagarde, president of

the ECB, aid in Februarys.

Ms Lagardehas, however,promised

to study theside-effects f negativeo

rates, as part of a strategic review of

monetary policy. “The longer our

accommodative measures remain in

place, the greater the risk that side-ef-

f e c t s w i l l b e c o m e m o r e p r o -

nounced,”she told the European

Parliament.

Stefan Ingves, governor of the Riks-

bank,argues that negative rates have

beena success in Sweden. But he

acceptsthat had they continued indefi-

nitelythey could have had a detrimental

impact,raising questions about their

future value to policymakers.

The Riksbank introduced sub-zero

rates in 2015, not duetoweak growth —

gross domestic productincreased that

year by 4.4 per cent n the EU memberi

state — but because of the risk of defla-

tion. Inflation dippedbriefly below zero

in 2014 and only returned to the Riks-

bank’s 2 per cent target at the end of

2017, when Sweden’s repo rate stood at a

record low of minus 0.5 per cent.

Swedish inflation remains

below target

Annual  change in consumer prices

-

-













      

Sweden

Eurozone

Source: Eurostat

The negative rates club

Central bank policy rates ()

-

-









    

ECB Switzerland Sweden

Japan Denmark

Source: Refinitiv

Stefan Ingves, governor of the

Swedish central bank, left, says QE

alongside negative rates helped lift

the country’s economy. ECB chief

Christine Lagarde, right, has

instigated a strategic review of the

effectiveness of monetary policy

FT montage; Riksbank; Bloomberg; Getty

Inverted world Negative rates force

lenders to pay to store money at central

banks rather than earn interest on it

Good policy? Without sub-zero rates

the eurozone economy would today be

almost 3 per cent smaller, the ECB says

Cheap money boom Another risk from

negative rates is thatthey inflateasset

price bubbles

‘Sooner or later, we will

have to pay the bill for

this experiment of

negative rates’

Jakob Carlsson, Lansforsakringar Liv

‘The macroeconomic

effect of unconventional

measures remains

positive’

Olli Rehn, ECB governing council

strugglinginstitutions, discouraging

lending and prompting savers and com-

panies to hoard cash.

As a byproduct, Dietmar Schake,

sales director of Burg-Wächter, says

Germany’s largest safe manufacturer

has benefited from a one-third increase

in sales since the deposit rate at the ECB

went below zero. “Customersprefer to

keep their money at home rather than

in their bank accounts, where negative

interest rates are threatening,” he adds.

Mr Ingves saysSweden’s banks have

coped better than those in the eurozone

because a lack of bad loans and lower

costs mean their return on equity has

stayed relatively high. But even here

there is now relief. Johan Torgeby, chief

executive of one of Sweden’s largest

banksSEB, says lenders involved in

fixed income “struggledfor years” and

calls the end of sub-zero rates “good

news”. He adds: “We have never really

understood what effect negative yields

have on [boosting]consumption.”

He is not alone. One of the reasons the

Riksbank gave for its decision to end

negative rates was that the public strug-

gled to understand the policy and

thought it “strange”.

Banks provide 80 per cent of loans to

European companies and households,

making them the main channel to trans-

mit interest rate policy into the wider

economy. The Association of German

Banks said ina recent reportthat nega-

tive rates had cost eurozone lenders a

total of €25bn since they were intro-

duced. “This burden is depressing the

profitability of the banks and will ulti-

mately even constrain their lending

capacity,” it warned.

Much of the debate about negative

rates hinges on the idea of a “reversal

rate” below which lending activity by

banks is subdued and starts to fall.

Research published last year by Prin-

ceton University economists Markus

Brunnermeier and Yann Koby found

many of the benefits of negative rates

are front-loaded — such as gains in asset

prices on bank balance sheets — while

thecorrosiveside-effects last longer.

Bank lending in the eurozone was,

however, shrinking when the ECB first

cut rates below zero in2014 and has

sincerebounded. Household lending is

up more than 12 per cent since negative

rates started, while corporate lending

has grown 3 per cent. The ECB has also

taken action to soften the blow for the

banking sector, including a “two-tier”

deposit system that exempts some of

“Inflation actually came back. So in

that respect, going negative made the

whole thing work,” Mr Ingves says,

stressing thatquantitative easing — gov-

ernment bond-buying — helped.“The

issue for us hasn’t been to stay negative

for longer thanwe needed to.”

The Riksbank has been here before.

Its 2010-11 decision to raiseinterest

rates after the financial crisis was

closely scrutinised. On that occasionit

reversed course and cut rates again

soonafterwards, drawing charges of

“sadomonetarism” from Nobel-prize

winning economists and inspiring the

Fed toslow its monetarytightening.

Now, there arequestions being asked

again fter the Riksbank raised ratesa

while the Swedish economy is slowing

and inflation falling. Mr Ingves is clear

that in a world wracked by economic

uncertainty, “if the hoice were to be atc

zero or slightly negative, to be at zero is a

good place to be”. He argues that as

Swedish growth has been stronger in

recent years than the eurozone’s “it is

not all that strange that we slightly dis-

tance ourselves from the eurozone”.

Yet, some economists rgue that thea

Riksbank may be forcedto return to

negative territoryif the economy weak-

ensor the sharp drop in inflation — the

annual rate fellfrom 1.7 per cent to 1.

per cent in January on the back of low

energy prices — intensifies.

Learning the lessons

After five years of running a negative

rates policy the Riksbank governor

identifiesseveralareas where, he

believes, they could cause long-

termproblems. Top of the listis the

banking system, where critics claim

negative rates could weaken already

2014

Jun The European Central Bank

cuts its deposit rate below zero for

the first time to -0.1 per cent

2015

Jan he Swiss National Bank cutsT

its deposit rate into negative

territory for the first time to -0.

per cent

Feb iksbank becomes first centralR

bank to cut its repo rate below zero

while Danish deposit rates hit a

world-record low of -0.75 per cent

2016

Jan Bank of Japan introduces a

negative interest rate for the first

time of -0.1 per cent

Mar orway cuts rates to a recordN

low of 0.5 per cent, but never goes

negative and starts hiking again in

2018

2019

Aug The total amount of negative

yielding debt peaks at $17tn

Aug yske Bank in Denmark offersJ

a 10-year mortgage at -0.5 per cent

but also imposes negative rates on

some rich individuals’ deposits

Sep S President Donald TrumpU

calls on the Federal Reserve to cut

interest rates to zero or below to

enable the country to refinance its

debts more cheaply

Timeline

FEBRUARY 21 2020 Section:Features Time: 20/2/2020- 17:48 User:alistair.hayes Page Name:BIG PAGE, Part,Page,Edition:USA, 7, 1