Time for central banks to turn tide against negative policy
SOONER OR later, the European Central Bank and the Bank of Japan will have to turn against their policy of negative interest rates.
The ECB recently surprised the market by leaving all of its key policy rates and its asset-purchase programme unchanged. However, the debate on the coming decision of the BOJ is far from over.
After three years of monetary easing programmes that repeatedly missed its target inflation rate of 2 per cent, the BOJ governor at the central bank’s July meeting ordered staff to prepare for a comprehensive review of its policy framework. His latest speech last week rejected the idea that negative rates could hurt private commercial banks but acknowledged that they had spurred a drop in long-term yield and in pension value.
This speech was interpreted by some as indication that BOJ will make a fundamental shift in its negative-rate policy, while others still think that the Japanese central bank will go for even lower rates than the current -0.1 per cent.
Being trapped in negative policy rates for too long may not be the right strategic policy choice. This is because, in an elderly society like Japan, a negative rate can cause a drop in long-term yield as well as pension value, and hence seriously lower household consumption and finally economic growth. Hence a better stimulus policy for Japan is to open up more to young foreign workers.
The US Federal Reserve, on the other hand, may gradually raise its federal funds rate before the end of this year because of a tighter job market.
A recent argument by Fed Board of Governors member Lael Brainard indicated that there was no clear evidence that inflation was responding to a tighter job market. The comment reduced the chance of a Fed rate increase as early as next week.
However, one should not forget the fact that the recent distorted low interest rates have only been sustained by previous easing programmes after the financial crisis. Hence a gradual rise in policy rates back to their normal level should be justified with or without serious inflationary threats.
PROFESSOR ARAYAH PREECHAMETTA is a lecturer at the faculty of economics, Thammasat University.
