Standard and Poor's attacks negative interest rates as desperate and damaging

Jake Cordell
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Negative interest rates might be too complicated and counterintuitive to work (Source: Getty)

Central banks’ experiment with negative interest rates risks backfiring in spectacular fashion, top ratings agency Standard and Poor’s (S&P) has warned.

In a new report assessing the impact of sub-zero borrowing costs on economies and industries around the world, the ratings agency concluded: “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.”

Read more: Negative interest rates sparks gold rush

So far, the European Central Bank (ECB) and the Bank of Japan (BoJ) are the two largest banks to set their headline interest rates below zero. With both economies still struggling for growth and inflation, economists expect them to sink even lower before any eventual return to normality.

In the UK, governor of the Bank of England Mark Carney has dismissed the idea of cutting rates below zero, although he is expected to come close, with markets pricing in a cut to 0.1 per cent by the end of the year.

Banks looking down

Headline interest rate
Eurozone (ECB) Minus 0.4 per cent
Japan (Bank of Japan) Minus 0.1 per cent
Switzerland (Swiss National Bank) Minus 0.75 per cent
Sweden (Riksbank) Minus 0.5 per cent
Denmark (Danmarks Nationalbank) Minus 0.75 per cent

Listing a string of criticisms, S&P attacked negative rates for eroding banks’ profitability, being too complicated for people to understand, promoting excessive risk among asset managers and potentially encouraging people to hoard cash. Nevertheless, the ratings’ agency said in the Eurozone, at least, it appeared the policy was having some of its desired effects in stimulating lending and ushering in higher levels of inflation.

However, in Japan looser monetary policy has been accompanied by a sharp appreciation in the value of the yen – the opposite of what was expected. Moreover as central bankers consistently make last-ditch "whatever it takes" speeches, they have consistently disappointed in both Europe and Japan, falling short of market expectations for further stimulus.

John Kingston, director of global market insights at S&P said he feared negative rates could “have a deleterious impact on the economy, and create the need for more stimulus.”