Central banks may use negative interest rates as stimulus

Oct 26, 2015 (LBO) – Negative interest rates is a possibility in the United States following in the foot steps of interest rates pushed below zero in countries such as Sweden, Switzerland and Denmark, according to some analysts.

Speaking in Colombo at the DFCC Economic Forum, Akshay Chinchalkar, head of charts and technical analysis for Bloomberg in South Asia, said no central bank knows how to handle deflation.

Central banks worldwide have cut interest rates 68 times this year and some countries are experiencing negative interest rates.

Investors now pay the Swedish and Swiss governments to hold their cash, a phenomenon previously thought unlikely by economists, which could be used to attempt further economic stimulation.

Sweden’s Riksbank has a repo rate of negative 0.35 percent, and in Denmark the rate on certificates of deposit with the central bank is negative 0.75 percent.

The U.S. government has held 46 Treasury-bill auctions since 2008 in which yields have been zero, according to CNBC.

Narayana Kocherlakota, president of the Minneapolis Fed, said on Oct 8 that the Fed should consider pushing rates below zero to help raise employment and drive inflation toward the Fed’s two percent target which it has missed for the past six years.

Although the need for negative interest rates is a minority view, many Fed members have expressed their opposition to a rate hike this year.

According to Chinchalkar, loose monetary policy has pushed up stock markets worldwide creating a false sense of economic prosperity.

There has been a concurrent surge in central bank balance sheets to the tune of 10 trillion dollars, with central banks holding more bonds.

“The big risk is to bond prices when interest rates start going up,” he said.