Negative interest rates are not a magic pill for growth

UNTIL recently, the spectre of negative interest rates seemed a distant one - afflicting parts of Europe since around 2015, and Japan in 2016.

Today, the possibility that negative rates might permeate a wider swath of the world is not as far fetched as it might have seemed just a year or two ago. Concerns over a deepening economic slowdown are spurring rate cuts elsewhere, including Thailand and India. The European Central Bank last week cut its deposit rate further by 10 basis points to minus 0.5 per cent, a record low. In the US, the Federal Reserve cut rates by another 25 basis points this week, leaving open the possibility for more cuts this year. US President Donald Trump continues to push the Fed to cut rates to zero - even to negative - even though the US economy remains strong.

As at end-August, an estimated US$16 trillion of government debt carried a negative yield, of which Europe accounted for over half and Japan made up the balance. The seeds of negative rates were sown in the financial crisis of 2008 when central banks slashed interest rates to boost growth. Since then, except for the US, low interest rates have failed to work their magic. Global growth ex-US has been anaemic and inflation uncommonly low.