NEGATIVE INTEREST RATES’ IMPACT ON CURRENCIES
Years ago, a massive financial conflict saw the remarkable drop of interest rates globally, which had a hard time recovering due to the sluggish economy that followed. Just last year, new hints of economic slowdown are starting to surface, further burdening the rates and driving the nominal ones to a negative value. While it was initially concluded that zero was the lowest point a rate can reach, several nations have persisted to suffer from falling figures that go beyond this value. In majority of the cases, it is noticeable that a decline in these metrics coincided with the devaluation of some currencies, with the yen slipping almost 18% against the pound and dollar.
This trends have pushed central banks to tweak their monetary policies in an attempt to ramp up investment to generate inflation. Despite this, inflation sometimes cannot do its magic due to excess capacity in certain markets. In response, participants usually remain conservative, thus dampening the supposed outcome of policy ease.
Relationship and effects
Central banks usually expand regulations to counter the results of recession, weak consumer sentiment, and uncertain investments in the business field. They often do this by ramping up the supply of funds in an economy. For FED, their usual preference in doing this is through open market operations, in which the bank either purchases or sells securities to influence the range of reserve balances in the system. As the supply of funds rise, interest rates fall while the demanded quantity deteriorates. This process help prompt investments and spending, which in turn, lifts wages and jobs.
Furthermore, when the bank hikes the funds, it causes devaluation in particular currencies and reduce global clamor for securities in their corresponding countries as well. This results to their exports becoming less expensive at times, while making foreign goods more pricey.
A perfect example of a nation with a decreased denomination value is China, wherein Trump threw several criticism regarding their alleged unfair trade practices, which came simultaneously with headwinds in their manufacturing sector. They have already reduced their benchmark rate to 4.4% in 2016.
Meanwhile, a situation involving negative rates are considered as distinct, because the usual basis of lending decisions are breached. For example, a negative loan would mean the creditor will lose capital while taking on risks.The central government banks have established the concept of real rates, due to the high demand for low-risk securities due caused by diminishing returns on some asset classes. However, this does not stimulate economic progress so rates resort to negative territory to tap growth.
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