The U.S. Federal Reserve, the Bank of England and the European Central Bank all have been disappointed to varying degrees about how little inflation has picked up, or indeed how it has spent too much time going the opposite way.
The Bank of Japan, which has been trying to ward off deflation going on two decades, has now been hit with a counterproductive surge in the yen after a contested decision last month to adopt a tiny negative interest rate.
Even in China, where it is difficult to fathom the sheer magnitude of fiscal and monetary stimulus Beijing has piled on since the financial crisis, consumer price inflation is remarkably tame and likely to remain so.
Globally, European markets were up, but unsure. Fed Chair Janet Yellen’s fresh comments on firmness of the US economy kept everyone guessing on any further rate hike.
They do not set trends. They follow rates down. So when we talk about central bank setting rates, the first thing we got to remember is that the only rates central banks actually set are interbank rates, very short-term rates. In the US for instance, the Fed sets the Fed funds rates which is the rate at which banks borrow from a vendor.
So those are the rates that central banks can set to below zero. Now here is what makes interest rates or negative interest rates so difficult to grapple with.
If you take an one on one class, you are told that interest rates are what you charge if you lend somebody money. In other words, you are giving up current consumption for future consumption. If you are the lender and as a consequence somebody has got to pay you to give up that. So we are taught to believe that positive interest rates are what you should expect to see in any economy.