The Phaserl


The Fantasy World Of Central Bank Interest Rates Has Set The Stage For The Second Wave Of The Global Financial Crisis

by Valentin Katasonov, The News Doctors:

Starting from February, deposits made with the Bank of Japan began to accrue negative interest. The interest rate at the Central Bank of Japan now stands at minus 0.1%. This is no longer seen as shocking. The central banks in developed countries began backing into the negative zone for passive operations several years ago.

The motivation and rationale for the transition to negative interest rates on deposits varies among the different central banks. For the most part, the Swedish Central Bank and the ECB explained their decisions by pointing to the fact that the Swedish and eurozone economies are now faced with the threat of deflation. There are hopes that the negative rate will make money more accessible and will generate at least a bit of inflation.

The national banks of Switzerland and Denmark are primarily concerned about the threat of strong upward pressure on their national currencies (the Swiss franc and the Danish krone), due to the crisis in the eurozone, investors’ growing lack of confidence in the euro, and the sharply increased influx of capital from the eurozone into their banking systems. In each case, the directors of the four central banks mentioned the need to stimulate economic development and that in order to accomplish that, no one should be encouraging free capital to be deposited in banks. Negative interest rates on central bank deposits are intended to force commercial banks to turn their attentions to the real economy.

The transition to negative rates has had only a very modest effect. For example, the ECB set its rate at minus 0.10% in the summer of 2014. This step did not reduce the threat of deflation in the eurozone countries, and so the ECB had to further lower its rate. The last rollback occurred in December 2015, when the rate was set at minus 0.30%. Similar events took place at other central banks. The Swiss Central Bank started December 2014 with a rate of minus 0.25%, which a year later had already dropped to minus 0.75%. In the summer of 2015 the Swedish Central Bank was forced to trim its interest rate even further. This was a reaction to the strengthening Swedish krona. And the strengthening, in turn, was driven by events in Greece (the expected default and the eurozone crisis), which increased capital flight from the eurozone into neighboring European countries.

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