The Bank for International Settlements (BIS) — known as the central banks' central bank — is warning there's a "gathering storm" in the global economy, in part caused by governments around the world running out of monetary policy options.
In two separate notes, published
March 6, BIS economists highlighted the fragile global economic backdrop
and said negative interest rates could become a reality for many more
countries as central banks search for ways to stoke real growth and
battle issues like tumbling oil prices hitting the economy.
tension between the markets’ tranquility and the underlying economic
vulnerabilities had to be resolved at some point," said BIS chief
Claudio Borio. "In the recent quarter, we may have been witnessing the
beginning of its resolution."
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"We may not be seeing isolated bolts from the blue, but the signs of a gathering storm that has been building for a long time."
a report entitled "Uneasy calm gives way to turbulence," Borio warns
that 2016 is off to a terrible start and it's really freaking out the
central banks (emphasis ours):
The Federal Reserve's interest rate
lift-off in December did little to disturb the uneasy calm that had
reigned in financial markets in late 2015. But the new year had a turbulent start, featuring one of the worst stock market sell-offs since the financial crisis of 2008.
At first, markets focused on slowing growth in China
and vulnerabilities in emerging market economies (EMEs) more broadly.
Increased anxiety about global growth drove the price of oil and EME
exchange rates sharply lower and fed a flight to safety into
core bond markets. The turbulence spilled over to advanced economies
(AEs), as flattening yield curves and widening credit spreads made
investors ponder recessionary scenarios.
In a second phase,
the deteriorating global backdrop and central bank actions nurtured
market expectations of further reductions in interest rates and fuelled
concerns over bank profitability. In late January, the Bank of
Japan (BoJ) surprised markets with the introduction of negative interest
rates, after the ECB had announced a possible review of its monetary
policy stance and the Federal Reserve issued stress test guidance
allowing for negative interest rates. On the back of poor bank earnings
results, banks' equity prices fell well below the broader market,
especially in Japan and the euro area. Credit spreads widened to a point
where markets fretted about a first-time cancellation of coupon
payments on contingent convertible bonds (CoCos) at major global banks.
Underlying some of the turbulence was market participants' growing concern over the dwindling options for policy support in the face of the weakening growth outlook.
With fiscal space tight and structural policies largely dormant,
central bank measures were seen to be approaching their limits.
The below chart from BIS neatly sums up just how bad 2016 is shaping up to be for the global economy.
The idea of "dwindling options" for central bankers is
picked up by BIS economists Morten Linnemann Bech and Aytek Malkhozov
who look at the effects of negative interest rate policies adopted by
central banks recently — once seen as unthinkable but now necessary as
the armory of monetary policy weapons gets sparser.
In a separate review entitled "How have central banks implemented negative policy rates?", the pair write that:
Since mid-2014, four central banks in Europe have moved their policy rates into negative territory.
unconventional moves were by and large implemented within existing
operational frameworks. Yet the modalities of implementation have
important implications for the costs of holding central bank reserves.
experience so far suggests that modestly negative policy rates transmit
through to money markets and other interest rates for the most part in
the same way that positive rates do. A key exception is retail deposit
rates, which have remained insulated so far, and some mortgage rates,
which have perversely increased. Looking ahead, there is great
uncertainty about the behaviour of individuals and institutions if rates
were to decline further into negative territory or remain negative for a
Negative interest rates are intended to encourage borrowing, discourage upward pressure on currencies, and help trade.
handful of countries have already said goodbye to ZIRP (zero interest
rate policies) and hello to NIRP (negative interest rate policies). The
goal of negative rates is to deter institutions from storing cash in
banks and to flush that cash out into alternative investments, spurring
the economy, growth, and inflation.
However, while the Swedish government’s massive experiment with negative
interest rates seems to actually be doing what it’s supposed to,
according to the Riksbank monthly inflation report, which dropped on
February 18, negative rates are having a much broader impact around the
My colleague Ben Moshinsky pointed out in his analysis, "evidence that
negative interest rates aren't working to stimulate global growth is
getting hard to ignore."Bank of England Governor Mark Carney
warned at a G20 meeting in Shanghai that, while negative rates might be
an attractive way for an individual country to weaken their currency and
boost exports, the world economy will suffer as a whole.
They help to push economic activity around the globe, but do nothing to boost it.