Highly accommodative monetary policy regimes being followed by central banks across the world – and negative interest rate policies in particular – will have long-term consequences, veteran investor and executive chairman of the Templeton Emerging Markets Group, Mark Mobius writes in a blog post.
There is growing concern regarding the pursuit of negative interest rates by central banks including the BOJ and the ECB and others in Europe, Mobius says.
An important criticism of the low-rate environment we are in is that many people who want to save their money in a bank to gain interest wind up paying the price—particularly when inflation is factored in. Instead of earning interest on their deposits, they are essentially charged money to keep it in the bank!Mark Mobius, Executive Chairman, Templeton Emerging Markets Group
The rationale for negative interest rates is that if the commercial banks are penalised for holding cash with the central bank, they will choose to lend that money out into the economy instead. Low rates are also supposed to push people to spend. But that’s often not the outcome that we see, according to Mobius.
So we are now in a situation where private banks in those countries must pay the central bank to keep their money on reserve, and investors who purchase government bonds must pay those governments for the privilege of lending the government moneyMark Mobius, Executive Chairman, Templeton Emerging Markets Group
Negative interest rates are making banks reluctant to lend, and people who would normally deposit their money in a bank are now sitting on cash, Mobius says, “The lack of interest earnings make people who are not able to invest the money elsewhere feel that they are financially disadvantaged.”
Mobius says pension funds are in trouble since “the safety they sought from government bonds normally held in their portfolios has not been earning any yield to speak of, and some are forecasting they will not be able to meet their obligations to pensioners in this prolonged low-rate environment.” This is increasingly pushing them towards riskier bonds and equities.
Lower interest rates on any particular currency can cause investors to flee that currency in search of higher interest rates, Mobius says. Governments wanting to be competitive in the global marketplace for goods and services thus encourage the currency weakening. This could lead to what may be termed “currency wars,” a “beggar-thy-neighbor” policy that can lead to political tensions when countries devalue their own currencies in an effort to compete with others.
Federal Reserve Rate Hike
Mobius says that a small rate hike will not have a notable market impact. But if the Fed raises interest rates quickly, other global central banks could follow.
Mobius posits that given the inadequacy of negative interest rate policies, banks could resort to ‘helicopter money’, that is, drop money into the pockets of consumers directly, thereby bypassing reluctant banks and encouraging people to spend more. But he argues that under conditions of uncertainty, as confidence deteriorates and business leaders become reluctant to invest, helicopter money can have the opposite effect and exacerbate growth slowdown in an economy.