domingo, 27 de septiembre de 2015

domingo, septiembre 27, 2015

Review & Outlook

Central Banks Below Zero

Serious voices are floating the idea of punishing cash.
 
Governor of the Bank of England Mark Carney on Sept. 16, 2015. Governor of the Bank of England Mark Carney on Sept. 16, 2015. Photo: Anthony Devlin/Zuma Press
 

The main monetary news last week was Janet Yellen’s decision not to start a modest liftoff in U.S. interest rates until, well, whenever. So it might have escaped broader notice that the Bank of England is inching toward the same conclusion, despite Britain’s recent success as the fastest-growing developed economy.

The central bank’s chief economist and a member of its policy board, Andrew Haldane, warned Friday that instead of thinking about its first rate increase in years, the BOE should figure out how it can cut rates further than near-zero in the next slowdown.

“The case for raising U.K. interest rates in the current environment is, for me, some way from being made,” he said. “One reason not to do so is that, were the downside risks I have discussed to materialize, there could be a need to loosen rather than tighten the monetary reins as a next step to support U.K. growth and return inflation to target.”

Mr. Haldane is one of the BOE’s doves, and commentators have played up a perceived conflict between his statements and those from bank Governor Mark Carney suggesting a rate increase could come next year. But Mr. Haldane’s remarks, especially those pointing to an economic slowdown in China, echo a theme recently picked up by central bankers in Washington and Frankfurt. And Mr. Carney isn’t exactly a hawk. In June 2014 he warned there might be a rate hike “sooner than markets could currently expect.” We’re still waiting.

Britain is getting caught in the same zero-interest-rate policy, or Zirp, trap that we’ve described in the U.S. Sustained low rates have kept many low-productivity businesses afloat instead of forcing them into bankruptcy; favored larger companies at the expense of smaller, more disruptive firms; and diverted investment into low-productivity areas such as property and construction. The longer this policy persists, the greater a drag it places on investment as businesses start to worry about when a rate rise might come.

This helps to account for the gap between economic growth and lagging productivity that perplexes Britain’s central bankers and leads them to delay a rate increase. The Tory government’s policy reforms, especially a cut in the corporate tax rate to 18% by 2020 from 28% in 2010 and welfare reforms that boost work, exceed most of the rest of the developed world and account for Britain’s growth. But abnormally low rates increasingly undermine those reforms by distorting the allocation of the investment the reforms encourage.

Mr. Haldane’s speech shows that rather than learning from this experience, central bankers are looking for ever more creative ways to continue their low-rate bets. Quantitative easing, in which central banks purchase sovereign bonds and other assets, was an early response to economies’ failure to respond to policy-rate cuts. Imposing negative interest rates on bank deposits with their central banks is the next step, which countries such as Switzerland already are trying.

Mr. Haldane ruminates on how the Bank of England could break below the “zero lower bound” during the next recession—especially the difficulty central bankers would face in reducing rates below zero when people can hold cash. Today’s negative rates can be imposed only on deposits at a central bank, but they can be avoided by withdrawing money from banks and putting it in a home vault.

Mr. Haldane says central banks need to find “a technological means either of levying a negative interest rate on currency, or of breaking the constraint physical currency imposes on setting such a rate.” In lay terms, he means diminishing at command the value of the cash people use every day. He mentions several options, from a stamp tax on cash to issuing digital currencies such as bitcoins instead of paper money and then depreciating the “exchange rate” between cash and the government’s electronic money.

All of this may sound far-fetched, but Harvard’s Kenneth Rogoff has also questioned whether paper money is still fit for a modern economy. Mr. Haldane says economists at the Bank of England are researching how a central bank could issue a digital currency.

This would be revolutionary for a developed economy: If monetary policy stops working, change the money. The fact that a respected policy maker is thinking along these lines makes us wonder if central bankers will everadmit that Zirp has become counterproductive.

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