Uncharted waters of negative interest rates create new uncertainties, risks

THE phenomenon of negative interest rates is worrying. Since the global financial crisis of 2008, global central banks have trod unconventional paths in their efforts to stimulate growth and reduce their country's or region's respective debt burdens.

The first phase saw central banks slash interest rates to zero or nearly zero, and launch into various degrees of quantitative easing (QE). The latest development of negative policy rates wielded by five central banks so far - those of Denmark, Switzerland, Sweden, Japan and the European Central Bank (ECB) - marks the second phase of intervention. That the objectives have hardly changed - to spur growth, consumption and investment, and stave off deflation - means that the first set of measures have done little to achieve these goals. This adds grist to sceptics' view that central banks may have exhausted their options.

The Bank for International Settlements' (BIS) latest quarterly report raises concerns. Its March research says that, so far, the "modestly" negative policy rates are transmitted through to money market rates in much the same way as positive rates are. The catch is that, so far, banks have been reluctant to pass on the negative rates through to retail deposits for fear of sparking massive withdrawals of cash. They also have not fed through to mortgage rates. In a puzzling move, the Swiss have raised the lending rate on mortgages. "If negative rates do not feed into lending rates for households and firms, they largely lose their rationale," says the BIS. On the other hand, passing the negative rates on to households and companies would raise questions about the stability of the retail deposit base. "In either case, the viability of banks' business model as financial intermediaries may be brought into question," said the report.