Key Points:
· Policymakers may have significantly underestimated the economic and market risks of a negative interest rate policy, a tool that may be increasingly ineffective at boosting growth and inflation.
· Negative interest rate policy is a contributing factor to the financial market volatility of the past few months and is possibly one of the major catalysts behind the tightening in global financial conditions.
· Further, negative rates act as a tax on savers and investors who must plan on lower rates of return into the future.
· In summary, negative interest rates may be a central bank tool that is increasingly ineffective at boosting growth and inflation, and may pose more risk to the financial system than commonly understood. It could very well be that a return to more normal monetary policy rates would beget a return to more normal economies with normal inflation expectations. Even if that were not to be the case, monetary policies more focused on easing financial conditions by lowering credit and equity risk premiums directly (for example, asset purchase policies directed at credit and equity, or raising the inflation target) may prove far more effective than negative interest rate policies that have many unknown costs and risks and, to date, have done more harm than good.
