The world eagerly waits as key Asian central banks are scheduled to hold policy reviews over the next few weeks. With the current trend of adopting negative interest rates to revamp the economy, these banks in emerging economies have garnered the interest of many investors.
However, before we go any further on this topic, a further understanding of how the negative interest rate came about, what it is aiming to achieve, and the reactions to it is required.
In short, negative interest rates came in response to the state of the global economy. The economy has been experiencing a downturn on a global basis and hasn’t really improved much despite traditional policies such as quantitative easing.
A few of the theories that attempt to explain the situation and, at the same time, support negative interest rates is that people with the money to invest and drive the economy are not really putting their money to good use. Instead, the theory goes on to suggest that this group of affluent citizens hoard their monetary assets in banks and live off the interest.
Therefore, in an effort to reflate the economy, negative interest rates were first adopted by some European banks and, a few months ago, Japan. Many analysts commented that this was an act of desperation, signaling to the world that central banks would be abandoning the traditional policies. To put it simply, the general public which now puts their savings in banks will now be required to pay the banks for the “privilege” of having them store their money.
Negative Interest Rates: A Global Phenomenom
Never before has the world experienced such widespread adoption of negative interest rate with five central banks in total – those of Denmark, the Eurozone, Switzerland, Sweden, and Japan.
Even though the move, on paper, seems to be theoretically sound by encouraging the banks to lend out money and the general public to do something more productive with their money, there has been lots of negative sentiment towards the new interest rates. More people are voicing opinions that this decision has led to more problems than solutions.
In addition to that, the Bank for International Settlements warned in a March 2016 report of “great uncertainty” should the rates stay negative for a prolonged period. It also warned of the case that should more and more central banks use negative rates as a stimulus tool, there is a legitimate concern that the policy might ultimately lead to a currency war of competitive devaluations.
As the public becomes more concerned about the possibility of another downturn and sinking oil prices, they also become more skeptical about the benefits of negative interest rates, especially its effect on the viability of commercial banks.
The negative rates are expected to decrease the available cash pool that banks can use to lend money. As the central bank’ rates fall, so does the profit of the commercial banks.
ASEAN in Focus for Rate Cut
Now the world is watching to see the next steps of many Asian emerging markets. With countries such as Indonesia, Thailand, Philippines, and Taiwan looking to hold their annual policy reviews, the central banks in those countries seek to lessen concerns about potentially destabilizing spillovers from the rest of the world.
The central banks in India are also making sure their voices are heard. The Governor of the Reserve Bank of India called on global banks to create a system to assess the impacts of unconventional monetary policies.
A Malaysian bank governor also commented that there needs to be better communication between the many central banks in the world for better policy coordination.
With one Asian country, Japan, already setting negative interest rates, the rest of the world waits in eager anticipation of what policies central banks in Asia will decide on.