FAST FIVE: One Bank Makes A Stunning Discovery: There Is No Longer A Correlation Between Negative Rates And Currency Moves
As BofA's Athanasios Vamvakidis summarizes, negative rates are a form of financial repression, penalizing banks that do not extend enough credit, while at the same time financial regulations are not allowing banks to be particularly aggressive.
Even if banks extend credit under pressure, “the quality of such credit could prove to be questionable, eliminating market discipline, jeopardizing the banks' portfolio in the long term and leading to lower potential growth for the economy as a whole.” Indeed, as the most recent IMF summit demonstrated (see “The Verdict Is In: “Negative Rates Are A Huge Negative For Savers, Low-Income People, And Investors”) , most central banks have acknowledged such problems, as well as risks from keeping policy rates negative for too long.
The market was pricing two hikes for the Fed when this year started, then moved to pricing four cuts this year and another four next year by mid-2019, and is now pricing only one cut for next year.
To BofA, “these arguments are not valid anymore.” BofA's conclusion is rather groundbreaking: if negative rates no longer impact relative FX strength, central banks may want to bring rates back to zero.
As such any hope that central banks can agree among each other to cut only to zero and never below, is nothing but a pipe dream.