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Negative rates force central banks to take more risk

Tuesday, April 19, 2016 - 18:30

[LONDON] Negative interest rates in the developed world have forced central bank managers to take more risks as they strive to maintain the value of the trillions of dollars worth of assets they hold in reserves, a survey showed on Tuesday.

The poll of 77 managers, responsible for reserves worth US$6 trillion, also showed some 32 central banks are now invested in China's renminbi, up from 20 a year ago, before the decision to add it to the IMF's SDR basket of reserve currencies.

The negative rates prevalent in Japan and a number of European markets has forced managers to withdraw capital from some currencies and move into markets they previously would have tended not to invest in, the report showed.

"Reserve managers are navigating a rapidly evolving and unprecedented environment. As a result many have made significant changes to their portfolios over the last year," said HSBC's Global Head of Central Banks, Sovereign Wealth and Public Funds, Christian Deseglise, commenting on the report.

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"Negative rates, in particular, are having far reaching investment implications, leading to use of longer duration instruments, an increased tolerance for credit risk and a move into new asset classes and currencies. The use of the renminbi as a reserve currency is also spreading at an impressive pace."

Some 80 per cent of those surveyed by publisher Central Banking Publications said the trend of negative rates had had an impact on reserve management strategy.

All responses to the survey were on the condition that neither the banks nor the reserve managers were named.

One European reserve manager quoted by the survey said that central banks had reduced their exposure to currencies including the euro, the Swiss franc, and Swedish and Danish crowns as part of the response to negative rates. "This rebalancing is affecting exchange rates between currencies," the reserve manager said.

Data from the IMF last month showed the euro's share of allocated global foreign exchange reserves shrank to less than 20 per cent in the fourth quarter of last year - its lowest in nearly 14 years.

The franc's share was roughly steady at 0.3 per cent, while those of the Danish and Swedish crown were too small to be broken out by the data.

REUTERS

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