South African Reserve Bank. Picture: MARTIN RHODES
South African Reserve Bank. Picture: MARTIN RHODES

It is apt that Sweden, a pioneer in the West when it came to the use of negative interest rates to ward off deflation as the global economic slowdown sparked by the financial crisis persisted, is debating the effectiveness of the strategy.

While there is still a debate about whether it succeeded in its primary goal of boosting consumer-price growth, at 1.2% in January, the rate was just twice the lowest level of 2015, when the central bank went into the unknown.

The fear at the time was that price growth would go negative and if they stayed there would entrench a negative spiral where lower prices encourage consumers to delay spending in the hope of getting even lower prices later on. That in turn discourages investment in production and ultimately what results is rising unemployment, recession or even depression.

Negative rates have consequences that are undesirable. Pension funds, which hold a huge proportion of “safe assets”,  have seen returns on their bond holdings depressed and in some cases have had to pay to lend money to governments.

Banks have been similarly weakened, paying billions to central banks for keeping their deposits, while prospects of negative returns could prevent consumers from keeping money at commercial banks. That was probably one of the reasons why for a long period commercial banks chose to take the hit and not pass on the negative rates to depositors. 

That debate is unlikely to be settled any time soon. Instead, it has sparked a whole new one as the world is gripped by the coronavirus outbreak in China, which has spread rapidly to other parts of the world, threatening an unprecedented halt to global economic activity.

The spread, which saw New York and Berlin on Monday being among cities that have reported their first cases, has led to intense speculation that authorities across the world will introduce a new round of stimulus.

The question is, with interest rates in the eurozone below zero, those in the UK under 1% and the main rate in the US just below 2%, what can monetary policy achieve?

When central banks unleashed an unprecedented amount of stimulus to deal with the global financial crisis that started a decade ago, the question was always whether they had gone too far and would therefore find themselves ridiculously short of ammunition when the next one came.

That day has arrived, and the question.

The challenge for central banks is that if they are facing what is essentially a supply-side risk, what use is interest rates? If workers aren’t able to leave their homes to go to work, shop or take holidays, the relative cost of money isn’t going to be the main important determinant of their economic behaviour.

Therefore, it’s questionable how long the relief rally that followed a Federal Reserve statement on Friday that it could cut rates in light of evolving (not revolving) risks will last. For similar reasons, the prospective of fiscal stimulus from governments is also proving to be ineffective in boosting confidence.

For SA, this latest global crisis couldn’t have come at a worse time. Last week’s budget laid bare the fiscal crisis the country finds itself in after a decade of mismanagement and lacklustre growth.

With just over two weeks before the SA Reserve Bank decides on interest rates, attention will turn to how our policymakers react to the coronavirus outbreak and the effect on markets.

Under normal circumstances the kind of currency depreciation that has seen the pound at more than four-year lows above R20/£ and approaching R16/$ would have analysts debating the potential inflationary effect and the possibility of higher interest rates.

It’s not much of a consolation, but the kind of hit we can expect to demand at a time when some analysts are predicting that China’s economy could contract about 6% on a quarterly basis probably means inflation will be the least of our worries.

With our rates nowhere near zero, we might at face value look as if we’ll be among the few with a room for a sizeable monetary stimulus injection. But it’s most likely that the prudent step would be to stay put, lest we risk a run on our assets.