LONDON The era of zero or negative interest rates, notably in Japan and the euro zone, could extend for several more years as central banks battle persistently low growth and inflation, strategists at Barclays said on Thursday.
The downward pressure on interest rates will be strongest in Japan and the euro zone, while the greater flexibility and resilience of the U.S. and UK economies should allow interest rates there to rise quicker, albeit extremely gradually.
“Negative nominal interest rates are more than just a passing monetary fad,” Barclays said in its 61st annual Equity Gilt Study.
Barclays said the natural rate of interest across the developed world, where borrowing costs are neither stimulative nor restrictive given an economy’s potential growth and inflation rates, is lower than where nominal rates currently stand.
The study finds that real equilibrium policy rates are near-zero across the developed world and may need to fall further below zero in the euro zone and Japan for interest rate policy there to become “sufficiently accommodative”.
Michael Gapen, the bank’s chief U.S. economist and co-author of the report, said the way to avoid a repeat of Japan’s experience over the last two decades is to restructure “zombie” banks and firms so that the broader private sector can clean itself up and get itself in shape to start growing again.
This could be most difficult in the euro zone, where the mix of slow growth, low inflation and a fractured banking system blighted by bad loans will make it difficult for the European Central Bank to escape low or negative rates.
“The era of low or even negative interest rates across the developed world, particularly in Japan and the euro zone, could last for several years to come,” Gapen said.
In 1995 the Bank of Japan lowered its main interest rate to 0.5 percent to try and reflate the flagging economy. Rates have never been higher since and the BOJ has also injected trillions of yen worth of stimulus via quantitative easing bond purchases.
The BOJ is still fighting that battle against low growth and deflation. Earlier this year it adopted negative interest rates on certain bank deposits and became the first G7 rich country to have yields on its benchmark 10-year bonds fall below zero.
“We don’t see a ‘Japanification’ of the world. But accommodative policy is here to stay,” said Christian Keller, head of economics research at Barclays and also a co-author of the study.
“Before we get to the limits (of these policies), central banks will persist with zero and negative rates,” he said.
The ECB already applies negative rates on banks’ cash deposits and is expected to cut them deeper into negative territory at its next policy meeting later this month.
The Federal Reserve raised rates in December for the first time in a decade but is unlikely to continue tightening policy at the pace it intended back then. Fed chair Janet Yellen batted away questions about negative rates at a Congressional hearing last month.
(Reporting by Jamie McGeever; Editing by Mark Heinrich)