The Puzzling World of Negative Interest Rates
Stewart Robinson, Senior Economist (UK and Europe), Aviva Investors
The increasing number of central banks taking interest rates into negative territory has called conventional economic wisdom into question. And, as Stewart Robertson explains, predicting where rates go from here has become even more difficult.
The setting of interest rate policy is supposed to be simple. By changing interest rates, central banks worldwide can influence the direction of economic growth and the rate of inflation - a nudge on the brakes when the economy is seeing inflationary overheating; a tap on the accelerator when activity is too subdued. Lower rates make savings less attractive and borrowing more so, stimulating spending and boosting economic activity; while higher rates do the opposite, raising the cost of borrowing and encouraging saving.
Although there have been some notable ups and downs along the way, it seemed to work, more or less. The Bank of England’s long history of UK base rates shows clearly periods of rigidity, relative stability, the effects of wars, and what happened when inflation took off in the 1960s, 1970s and 1980s.
Read the commentary