Ótima analise sobre um conhecido dilema da política monetária do ECB: ' going negative",
The ECB decided yesterday against “going negative” by reducing its deposit rate from zero to -0.25 per cent. The Governing Council again debated the pros and cons of such a measure, which would represent the first time that any of the major four central banks would ever have reduced a key policy rate to below zero [1]. Mr Draghi said again that the ECB was “technically ready” to take this action, and that the option remains “on the shelf”.
Many in the markets believe that this is just a bluff to prevent the euro from rising in the foreign exchange markets. There have been several unsupportive comments from leading members of the Governing Council (Asmussen, Mersch, Noyer and Nowotny) and Mr Draghi admitted that disagreements exist in the Council. Nevertheless, the President has deliberately left the option on the table, so it is important to understand the debate.
The technical aspects of negative rates have been very well covered in FT Alphaville recently, but I would like to focus on the broader policy implications. Why would a central bank want to take this action, and could it back-fire on them?
The fundamental case for trying to move interest rates into negative territory is of course the same as it is for reducing interest rates at any other time, which is to bring private expenditure into the present from the future. In order to do this, interest rates on savings and borrowing throughout the economy need to decline, so there has to be a pass-through from the central bank, via the commercial banks, to households and corporates. Other desired effects can be a lower exchange rate, and a decline in bond yields, resulting in higher asset prices.
It is not at all clear, however, that any of these effects would operate if the ECB were to go negative, and there is some chance that the impact would be perverse.
FT Alphaville has suggested that a cut in the rate paid on bank deposits at the ECB would reduce money market liquidity and may not even be translated into money market rates, such as the overnight eonia rate. The discussion here can become rather abstruse, but my own view is that the ECB could certainly drive the eonia rate negative if it wanted to do so, and it is important to note that market rates in Denmark followed the policy rate when the latter went negative. Therefore, I assume that short term money market rates in the eurozone would drop below zero.
This might have an impact on the euro exchange rate, that cannot be taken for granted. A key consideration is that a cut in the deposit rate to -0.25 per cent would almost certainly be the last rate cut in the ECB’s armoury, because any further move into negative territory may induce banks and others to hold physical currency instead of deposits. That process would rapidly become a wasteful nightmare. Consequently, foreign exchange traders would not need to fear any further rate move into deeper negative territory by the ECB, and this could actually encourage them to hold long euro positions.
More important, the follow-through from money market rates to other rates in the economy is far from assured. In Denmark’s case, there was no transmission of negative rates to lower rates on customers’ bank deposits, so banks’ margins were reduced. Banks might seek to restore their profitability by raising the rates they charge on customer loans, which would of course be the opposite of what the ECB intends. This has not happened yet in Denmark, but nor have lending rates dropped either. So the ECB might well find it difficult to transmit its rate reduction to the rest of the economy.
Meanwhile, the arrival of negative money market rates would lead to a number of practical problems, some of which may be serious. Zero is not just like any other number. Last November, Eurozone banks represented to the ECB that some money market funds would not be able to handle negative rates (because their net asset values cannot be reduced below par). In the US in 2008, this caused a disruptive run on money market funds, some of which collapsed.
Recent reports suggest that about half of the eurozone’s money market funds have now changed their legal structure so that they can handle this problem, but that still leaves half of a €1tn industry to worry about!
Furthermore, JPMorgan has argued that negative money market rates would be likely to cause problems for the repo market in government bonds, where a reduction in liquidity would be very unwelcome. Danish experience suggests that money market rates might become much more volatile as banks try to pass the “hot potato” of loss making deposits among themselves at very short notice.
The final perverse effect would come on bank profits. Since the 2008 crash, the central banks have been helping to repair banks’ balance sheets by offering them very low cost cash which they could use to purchase other, higher-yielding assets, such as government bonds. A reduction in deposit rates to below zero would act as a direct tax on the banks. While many observers might think this is appropriate, the ECB probably does not agree with them.
Conclusion
The conclusion is that a move into negative territory would, at most, involve only a small decline in money market rates, which may not be followed by similar moves in the rates which really matter, on customer deposits and loans. There could be some disruptive effects in the money markets, and damage to bank’s profitability, which is currently undesired.
It is not surprising that the ECB, like the Fed and the Bank of England before it, has been reluctant to go down this path. If further non standard measures are needed from the ECB, as they probably will be, Mr Draghi may struggle to get a majority in the Governing Council for negative rates. An ultra long, ultra low cost, LTRO seems much more likely.
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Footnote [1]
Denmark reduced its equivalent to the ECB’s deposit rate to -0.2 per cent last July, and it is now at -0.1 per cent. Sweden briefly went negative with its policy rate in 2009-10. There have been several other occasions when market interest rates have been negative, including negative Swiss bank deposit rates in the late 1970, and negative treasury bill rates in the core countries of the eurozone during the recent crisis.
Gavyn Davies
Fonte: FT
