I have criticized Wall Street Journal reporter Brian Blackstone in the past for not appreciating the power of negative interest rate policy:
- The Wall Street Journal’s Big Page One Monetary Policy Mistake
- Brian Blackstone Doubles Down on a Big Mistake in Reporting on Monetary Policy
But Brian Blackstone is beginning to show a greater appreciation for negative interest rates in his October 18, 2015 Wall Street Journal article
- “Switzerland Offers Counterpoint on Deflation’s Ills: Country shows falling consumer prices can go hand in hand with steady growth, low unemployment.”
Here are some of the key passages:
1. Consumer prices in Switzerland have fallen on an annual basis for most of the past four years. … Even after food and energy prices are stripped out, core prices fell 0.7%.
“It’s hard not to call that deflation,” said Jennifer McKeown of Capital Economics …
And yet evidence of deflation’s pernicious side effects—recession, weak employment, rising debt burdens—is pretty much nonexistent in Switzerland. Its economy is expected to expand this year and next, albeit slowly, in the 1% to 1.5% range. Unemployment was just 3.4% in September. Government debt is low.
2. Some of that success is due to the shattering of another long-held maxim: that central-bank policy rates can’t go negative to offset the effects of falling prices.
3. Major central banks prefer annual inflation of about 2% to provide a cushion against deflation.
4. To keep the franc in check, the central bank may be forced to cut the deposit rate even further, analysts say, particularly if the ECB eases policy more.
Brian asks the following question,
So why aren’t central banks embracing the Swiss example?
The answer he gives is this:
Analysts note that it’s difficult to distinguish between good and bad deflation until it’s too late.
But to me the answer is simpler. Deflation is not a good thing, but deflation holds no terrors if a central bank understands how to use negative interest rates. To me, this is the message of Brian’s article, though he doesn’t say it himself.
Although it hasn’t done so yet, because the Swiss National Bank knows how to make the rate of return on paper currency negative if people ever started storing large amounts of paper Swiss francs, it can dare push interest rates lower than other central banks that do not fully understand how to break through the zero lower bound.
You might be interested in the other things I have said about the Swiss National Bank and negative interest rate policy:
- The Swiss National Bank Means Business with Its Negative Rates
- Swiss Pioneers! The Swiss as the Vanguard for Negative Interest Rates
- Q&A on the Swiss National Bank’s Move to Negative Interest Rates
- Negative Interest Rates and Financial Stability: Alexander Trentin Interviews Miles Kimball
- Alexander Trentin and Sandro Rosa Interview Miles Kimball: Clinging to Paper Money is Like Clinging to Gold
- Alexander Trentin: Negative Interest Rates and the Swan Song of Cash
- 18 Misconceptions about Eliminating the Zero Lower Bound