The world economy would be worse off without negative interest rates, according to International Monetary Fund Managing Director Christine Lagarde.
Negative rates in Europe and Japan have helped support global growth and price gains, she said in an interview in Ho Chi Minh City on Friday. The finance sector may need to implement new business models as a result, she said.
“If we had not had those negative rates, we would be in a much worse place today, with inflation probably lower than where it is, with growth probably lower than where we have it,” Lagarde said. “It was a good thing to actually implement those negative rates under the current circumstances.”
Central banks in Europe and Japan have deployed negative interest rates to stimulate the economy, and Federal Reserve Chair Janet Yellen said the U.S. central bank is taking a look at the tool “in the event that we needed to add accommodation.” The policy moves have triggered concerns that they could have unintentional consequences such as hurting bank profits.
Negative interest rates are a fairly new economic tool and more time is needed to assess the policy, Lagarde said.
“So let’s see whether it kick-starts the process of fueling credit to the economy, changing the behavioral pattern of people and changing the strategy of banks as well,” she said. “It may be good for the economy — maybe not forever, but for a period of time.”
Former Fed Chairman Ben S. Bernanke said in a blog post later on Friday that negative interest rates “appear to have both modest benefits and manageable costs” and that market anxiety over below-zero borrowing costs “seems to me to be overdone.” While the chances of the Fed going negative are low for the foreseeable future, the central bank should probably analyze the option further, he wrote.
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Separately, Lagarde said the IMF may raise its 6.3 percent growth forecast for China due to the nation’s planned economic reforms and stimulus. The figure could be increased “a little more” after an assessment of a recently announced economic package, she said.
“We believe China will continue to grow,” Lagarde said. “If those reforms are implemented and the stimulus announced also directed to the most efficient leverage in societies, which we believe is more consumption than necessarily investment that would be fueled by credit, then the recipe should be quite good for China to lead a continued quality growth.”
Chinese Premier Li Keqiang opened the annual National People’s Congress by announcing this year’s economic growth target would be 6.5 percent to 7 percent. He said in his work report to the ceremonial legislature that such a pace “will allow for relatively full employment.”
Li also outlined plans to cut back inefficient industries and avoid mass layoffs while achieving growth targets that are challenged by rising debt and a global economic slowdown. The debt levels in the blueprint raised concern among some analysts about the sustainability of China’s economic growth.
(Updates with Bernanke comment in seventh paragraph.)
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