WASHINGTON Negative interest rates are a "net positive" for economies where they are deployed, but there are limits to how low they can go, the International Monetary Fund's monetary and capital markets chief said on Wednesday.
Jose Vinals told a news conference that banks may see some short-term reductions in profitability, but will benefit from improved macroeconomic fundamentals and upward repricing of some assets they hold, such as government bonds.
"Overall, negative interest rates are a net positive for the economy," Vinals said as the IMF released a new report showing that financial stability risks have risen.
His views clashed with those of German Finance Minister Wolfgang Schaeuble, who told Reuters in an interview on Tuesday that the European Central Bank's record low interest rates were causing "extraordinary problems" for German banks and pensioners.
Schaeuble also said these negative effects risked undermining voters' support for European integration.
Vinals, a former deputy governor of Spain's central bank, said that focusing solely on near-term reductions to bank profitability in assessing the effectiveness of negative rates was a "narrow view."
He acknowledged that banks would not be able to pass on negative rates to depositors, and said that deep negative rates for extended periods would ultimately cause damage to the insurance and fund management sectors.
"But banks benefit from a lot of things which come from the monetary stimulus that derive from both low, negative interest rates, and quantitative easing," Vinals said. "They benefit in terms of better economic prospects which contribute to better asset quality, lower non-performing loans, lower provisions. All of these enhance bank viability."
As far as savers are concerned, they too benefit from an improved macroeconomic environment, because this supports the value of financial assets, home prices, employment and government revenues.
"The gains are bigger than the losses," he said. "And that's why this is something that is right from a social policy objective."
Vinals also said an exit by Britain from the European Union in June would be a "negative shock" for the British and European economies as well as London's status as a financial center.
"I think that an exit of Britain from the European Union would be a negative shock economically and financially to Britain to the European Union and that's something that would be negative for confidence, including confidence in the role of the city of London as a global financial hub," he said.
(Reporting By David Lawder; Editing by Chizu Nomiyama and Meredith Mazzilli)
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Published Date: Apr 14, 2016 12:15 am | Updated Date: Apr 14, 2016 12:15 am