When banks employ a looser monetary policy the result is a rally for the stock market, but according to a Morgan Chase JPM analyst the continuation of measures into negative interest territory might cause the opposite to occur.
In its report, the bank compared how negative rates have impacted the stock market in countries who have employed them. It found that they all suffered market losses since the introduction of NIRP. For example, Swiss stocks went down by 9.0%, Japanese stocks headed lower by 6.7% and eurozone equities decreased by 4.6%. The only exceptions are Denmark with an increase of 22.4% and Sweden with an 0.8% increase.
|Equity performance after NIRP|
|Region||NIRP announcement||Current deposit rate||Equity performance since NIRP|
|Denmark||5th of September 2014||-0.65%||22.4%|
|Eurozone||4th of June 2014||-0.30%||-4.6%|
|Sweden||8th of July 2014||-1.25%||0.8%|
|Switzerland||17th of December 2014||-0.75%||-9.0%|
|Japan||28th of January 2016||-0.10%||-6.7%|
As we can see from the table above, negative rates have been counterproductive for the equities market thus far. Not only that, but it has proven to negatively impact the banks as well, rather then lead to economic growth. NIRP, so far, has only caused more damage.
The whole idea behind negative rates is to force cheaper lending and increased purchasing. Many economists were against negative rates, stepping on the argument that it only hurts banks’ profitability and that it works as a tax on the financial system. With the decreased health of the banks, the fear that NIRP could destroy economic recovery and continue to hold back growth increases.
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According to analysts at Bank of America Merril Lynch, by constraining the banking system with NIRP, banks might consider recouping their losses by increasing rates on loans and tightening financial conditions. Which in fact will be counterproductive for the whole easing plan.
According to J.P. Morgan’s Clau, Draghi should come up with a way to fight inflation without lowering the profitability of the banks. A good solution for this is another round of cheap loans and a tiered-deposit system in which the excess liquidity from banks would be placed with a rate above the deposit rate at the European Central bank.
Clau also added that market participants are becoming more skeptical about the final result of this measures, with the end-game being whether inflation will go up if the ECB succeeds.