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European Central Bank

The Eurozone has three key interest rates - one of which is the key deposit rate. The key deposit rate is at -0.4% which applies to commercial banks that make overnight deposits with the European Central Bank. The Eurozone’s main interest rate has also been cut to zero from 0.05%; that’s in addition to the European Central Bank extending its quantitative easing programme.

Swiss National Bank

In Switzerland the interest rate (key deposit rate) is -0.75%. Since December 2014, sight deposits above the threshold of around ₣320 billion are ‘punished’ with negative rates.

Central banks - running out of tools?

It’s too early to say with any certainty whether the negative interest rates decisions that have been made by the aforementioned central banks will spark economic growth over the long-term. However, it’s fair to say that these central banks are close to exhausted all of their options to boost growth. If these measures fail in their objectives, what else can the central banks actually do? This is especially true  for Japan and the Eurozone in  particular, both of which have also adopted strong quantitative easing programmes.

Traders must also consider the potential drawbacks of negative interest rates to economies. Negative interest rates are implemented to encourage borrowing by reducing the cost to access capital. However, negative key deposit rates (the charges applied to commercial banks for holding their reserves with central banks) could be passed onto customers. Should commercial banks ask their customers to pay a fee to deposit cash with them, that could deter people from using banks altogether. The problem here is that commercial banks could experience a shortfall in the capital they have available - making it even more difficult for them to fund loans and mortgages. 

Should commercial banks to choose not to pass negative interest rates onto their customers, there’s also reservations about the impact that could have on their long term profit margins - which again acts as a disincentive to increase lending levels.

In my own view, central banks are close to limit in terms of using their full arsenal of monetary policy levers. Negative interest rates can be seen as the last roll of the dice to kickstart the rate of growth.

Traders should closely monitor developments of the aforementioned central banks in the coming months, making a note on whether key economic data is improving from previous quarters. Prolonged negative interest rates will continue to drag of respective currencies - but what is of key importance is whether the policy actually stimulates meaningful growth, which remains to be seen.

Jarratt Davis
FX trader, Funds Manager and Mentor
Author of How to Trade a Currency Fund

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