Do You Know The "Twilight" Of Monetary Policy?

The European Central Bank will announce the latest interest rate resolution today. Amid the pressure of weak economic recovery and low inflation, the voice of the European Central Bank should expand the scale of QE and further reduce interest rates.

Citigroup chief economist Willem Buiter predicted on Wednesday that several major central banks, including the European Central Bank, will ease monetary policy in the near future, while the Federal Reserve and the Bank of England will postpone tightening policies and tighten monetary policy in a very gradual way.

Bloomberg data show that the benchmark index of the 20 most traded stocks in Denmark has risen by more than 100% since the second quarter of 2012, a two fold increase in the Storck Europe 600 index and the Dow Jones industrial average.

Danish housing prices also soared. The biggest bank of the country, Danish bank, even said Copenhagen was rapidly becoming the most risky real estate market in Scandinavia peninsula.

Meanwhile, Jesper Rangvid, a professor of finance at Copenhagen Business School's Copenhagen Business School, said that one of Denmark's main lessons was banks' reluctance to charge depositors for deposits.

Although some banks do raise fees, the real interest rate in real life is never negative.

So the Danes did not put cash in their homes.

Rangvid says interest rates must be as low as -10% before people start to "put a safe deposit box at home."

Switzerland and Sweden have similar experiences.

What will the European Central Bank do today? Let's wait and see.

Continue to cut interest rates, deepen the negative interest rate area, or expand QE? What are the strengths and weaknesses of the two? Abhishek Singhania, an analyst at Deutsche Bank, has discussed the problem in its latest research report, "finding absolute negative interest rates: why interest rates can be cut at zero interest rates".

1., risk of financial stability: in a highly leveraged or loose financial environment, pursuing negative interest rates may be more advantageous than implementing asset purchase projects, especially in the short term.

Asset purchase projects aim at lowering the term premium, thereby reducing the financing cost of the real economy.

According to our observation, by encouraging banks to raise lending rates, negative interest rates can actually help reduce leverage.

On the other hand, if the central bank promises to maintain negative interest rates for a long time, negative interest rate expectations will be rooted in the market and lead to a downward trend in long-term yields, which will lead to financial stability concerns similar to those purchased.

2. is the adequacy of assets purchased for QE: negative interest rates may be more attractive when an economy does not have sufficient assets to purchase large scale asset purchase projects that can continue to be implemented.

Take Sweden as an example. By the end of this year, the Swedish central bank's asset purchase project will buy 20% of the issued Swedish government bonds.

The scale of Swiss issued bonds is even smaller.

If the central bank decides to buy other assets that may have side-effects, this problem will become more prominent. For example, the Swedish central bank decided to buy covered bonds to enlarge the risk of the property market.

In the eurozone, although some European Central Bank officials have expressed their right.

Worries about the liquidity of government bonds, but the European Central Bank still has much room to expand its assets to other assets.

At least, the ECB can extend the current asset purchase project from December to September 2017 without expanding asset purchase targets or changing other parameters of asset purchase items.

Concerns about the loss of capital caused by massive balance sheets play an important role in deciding whether the central bank will abandon the open ended market intervention.

3. exchange rate or credit environment.

On devaluation currencies, negative interest rates seem to be a highly effective tool.

Short term interest rates are more likely to be affected by exchange rate fluctuations than long-term interest rates, perhaps because foreign exchange investors tend to use overnight or short-term lending to finance pactions rather than borrowing long-term funds.

For the overall economy, the negative interest rate has been greatly reduced in the relaxed credit environment.

As we have said, the experience of the four countries that are implementing negative interest rates shows that once the negative interest rate is implemented, the interest rate for households will not only decrease but may actually increase.

Moreover, so far, the market does not believe that negative interest rates will be long-term, so the impact on the long-term asset return rate is also limited.

Finally, as Praet, the chief economist of the European Central Bank, said, only when interest rates reach a lower limit, asset purchases can be reduced by rebalancing channels.

The impact may be maximized.

Under the condition that the short end interest rate does not have a lower limit and there is still a possibility of reducing interest rates, investors lack sufficient incentive to buy longer term bonds.

4. internal division (Fragmentation): Taking the euro area as an example, the deep negative interest rate and the European Central Bank's active expansion of the balance sheet (QE) may bring additional problems.

Funds released from asset purchases may return to the core members of the euro zone.

This means that the burden of negative interest rates will be borne by the banking sector of the core member states.

Making the deposit interest rate more negative does not necessarily encourage core countries to increase lending to foreign countries, because the opportunity cost of these banks is the difference between the market interest rate and the deposit interest rate, rather than the absolute negative interest rate.

When interest spreads are small, excessive liquidity will only make interest spreads smaller.

That's the main point of Singhania.

However, Torsten Slok, chief economist of Deutsche Bank in New York today, said, "negative interest rates will bring risks in the short term and will hardly help the economy compared with the effect of buying bonds".

Should the ECB go deep into the negative interest rate? From the effect of the negative interest rate of the Danish Central Bank, it will be difficult for the government to rely on negative interest rates to stimulate the economy.

It is the sole responsibility of the Danish Central Bank to ensure that the DKK is linked to the euro.

The central bank adopted the negative interest rate for the first time in the middle of 2012, when the European debt crisis happened, and investors were in a risk aversion mode.

Much of the time since then, Danish key deposit rates have remained below zero, currently at -0.75%.

Implementation from the Danish Central Bank

The results show that the Danish level of inflation has been negligible since 2012, and the growth of GDP has also been sluggish.

At the same time, Danish business investment growth is limited.

In the 12 quarter after the Danish Central Bank's policy interest rate dropped for the first time, corporate investment increased by less than 6%.

Personal consumption in the same period was also bleak, increasing by only 5%.

This seems to confirm the view of Nobel Prize laureate Paul Krugman (Paul Krugman) that "monetary policy will lose its effectiveness, especially when interest rates are close to zero."

As mentioned by Deutsche Bank's Singhania, the biggest negative interest rate is the stock market and the real estate market, which aggravates the risk of financial stability.