JPMorgan Says ECB’s Negative Rates Still Work But Can’t Do Magic

(Bloomberg) --

The European Central Bank’s negative interest rates are still bolstering the euro-area economy, but they “can’t do magic” and growing chatter about their detriment side effects is misplaced for now, according to JPMorgan Chase & Co.

There is no indication that people are switching to cash, nor are saving rates rising in any significant way, which would signal the policy is starting to backfire, according to Greg Fuzesi, an economist at JPMorgan in London. Low bank profitability or “zombie firms” also can’t be easily blamed on subzero rates, he said.

“Even if some effects may begin to look problematic, it would still be important to ask what the best response is,” Fuzesi said in a note on Tuesday. “Putting pressure on the ECB to raise interest rates would surely lead to a tightening in financial conditions and would reduce the support of very easy monetary policy for the economy.”

The attempted debunking of the criticism around negative rates comes as ECB policy makers increasingly voice their concern about the detrimental side effects of the policy they first implemented more than half a decade ago. One worry is the impact on financial stability as investors are pushed into riskier, less liquid assets in search of higher returns.

Fuzesi acknowledges that “the problem of low rates for pension funds, banks and savers must be monitored.” Yet despite concerns that they could be fueling real-estate bubbles, the housing market doesn’t look troubling compared to the period before the 2008 global financial crisis.

He also addressed the question of why is inflation still low -- at 1% in November it was far short of the goal of just below 2% -- if the ECB’s measures are supposedly effective. He puts that down to “bad luck” in the composition of the hypothetical basket of goods for measuring price growth -- a topic likely to be part of the ECB’s upcoming strategic review.

“The problem is that a bit more than half of the core inflation basket is volatile (German package holiday prices), affected by swings in energy prices (airfares) or not very cyclical,” Fuzesi said. “We expect core inflation to rise only slowly, but this reflects questions over the last part of the transmission mechanism (from wages to prices), rather than the entire process.”

To contact the reporter on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net

To contact the editor responsible for this story: Paul Gordon at pgordon6@bloomberg.net

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