BOJ Watchers Look to European Road Map After Move From Subzero
(Bloomberg) — Now that Bank of Japan Governor Kazuo Ueda has scrapped negative interest rates and the yield curve control program, the experience of Europe may offer investors clues on where things are heading.
The European Central Bank and some continental peers have also moved out of subzero territory in the last couple of years after adopting negative rates in their battles against falling prices in the 2010s.
Here’s a look at how they fared:
Swiss National Bank
Japan has been the world’s only subzero-policy jurisdiction since September 2022, when the Swiss National Bank became the last central bank in Europe to exit negative territory with a second hike to fight surging inflation in the wake of Russia’s invasion of Ukraine.
At the time, President Thomas Jordan was keen to state that officials were satisfied enough with the fruits of what had been the world’s lowest interest rate — at -0.75% — to be ready to contemplate using it again, despite its side effects.
“Negative interest has helped to dampen the appreciation of the Swiss franc and to ensure price stability. At the same time, we were always aware that negative interest can have undesirable side effects and presents challenges for many economic agents. On the whole, however, negative interest has proved its worth.”
In Switzerland’s case, the hike back to positive territory followed a peak in its consumer-price cycle the previous month. The country, whose strong currency insulated it from the worst of the cost-of-living crisis, experienced inflation reaching 3.5% in August 2022. That has now settled below the ceiling of the SNB’s 0%-2% target range.
The central bank went on to deliver three further rate hikes and, along with peers in the region, is likely to shift toward cuts in due course.
European Central Bank
By the time the SNB exited negative territory, the European Central Bank had already done so with its first move in July 2022. What had been originally touted as a tentative 25 basis-point step became an abrupt 50-basis-point increase as policymakers raced to catch up with major global peers whose tightening was already well under way.
The ECB’s delay to start tightening caused a massive selloff in the euro that didn’t stop with the first rate hike, and the currency eventually reached a two-decade low at $0.96. The rebound started a couple of months later, sending the euro to around $1.09 — the level it’s currently trading around.
Euro-area inflation peaked at 10.6% in October 2022, but that number masked huge divergences around the bloc, including annual price increases exceeding 20% across the Baltic region.
The surge in consumer prices led traders to price in more and more rate hikes, sending Germany’s two-year yield — among the most sensitive to changes in monetary policy — above its 10-year peer for the first time since the global financial crisis in 2008. The anomaly remains to this day, in a sign of investor concern over the growth outlook.
The euro area’s cost-of-living crisis has now largely abated, though the ECB has yet to reach its 2% goal. The last reading of inflation there was 2.6% for February — and 3.1% on the so-called core measure that strips out volatile elements such as energy.
Denmark, Sweden
Denmark, whose monetary policy shadows that of the ECB, ended its own subzero foray in September 2022, just weeks before the SNB did.
The Danish case was all the more poignant because that decision called a halt to the world’s longest experiment with negative rates, one that began a decade earlier. Its legacy had been an asset-price bubble and bruised banks, which had largely shielded depositors from the cost impact of the policy.
The only other economy in the region to deploy subzero rates was Sweden. There in December 2019, the Riksbank ended a half decade-long negative stint as its officials judged, after seeing strains on banks and pension funds, that the policy was causing more harm than good.
Princeton University professor Markus Brunnermeier observed at the time that the way subzero rates work is “very specific to the country” and that “some cannot go negative at all.”
That’s a view that was effectively shared by other members of the Group of Seven: Canada, the UK, and the US never went negative. The Reserve Bank of Australia cut to as low as 0.1% in the wake of the Covid-induced recession and embraced its own version of YCC.
The RBA was forced to abruptly abandon its bond-yield targets in November 2021 after an acceleration in inflation spurred traders to price in higher borrowing costs. Then Governor Philip Lowe acknowledged he was effectively bowing to market forces: Just days before the RBA scrapped the policy, the yield on the government’s April 2024 bond had jumped to nearly 0.80%, well above the 0.1% target.
The exit was “disorderly” and caused reputational damage, an internal RBA review found several months later. In February 2022, the RBA also concluded its quantitative easing program leaving it with more than 40% of government bonds on issue. Three months later, in May 2022, the central bank embarked on its most aggressive tightening cycle in a generation, taking its benchmark rate to a 12-year high of 4.35%.
Japan has long been an outlier on the global monetary scene, so whether such precedents from Australia and Europe are relevant is open to question. But if they are, the takeaway is that the shift out of negative territory is likely to be just the start.
–With assistance from Swati Pandey and Toru Fujioka.
©2024 Bloomberg L.P.
