Negative interest rates: Could Israel be next?

Negative interest rates – much like the duck-billed platypus, the very idea was so strange that for decades it was dismissed as an impossibility. 

But Israel very well may be on the brink of experimenting with this radical form of monetary policy. 

On Monday, Israel’s Central Bureau of Statistics released the CPI (consumer price index) data for January, 2016. The numbers revealed deepening deflation of the Shekel, with the CPI declining by 0.5% last month. This decline in overall prices came despite a continuing surge in the price of housing, which rose 8% in 2015.

The Bank of Israel kept the interest rate unchanged last month, fixed at the record-low rate of 0.1%. But even with near zero interest rates, the growth remains modest and inflation stuck in negative territory. 

Over the past two years there has only been one month of positive inflation in the CPI – May, 2014. This ongoing deflationary contraction limits both economic growth and job creation.

It’s a situation being faced by many countries in the wake of the 2008 Recession, and has led some central banks to adopt extreme measures once considered unthinkable.     

Last month, Japan’s central bank again cut its interest rate – this time into negative territory. With an interest rate of -0.1%, Japan is now charging depositors for storing their cash, while giving out almost free loans.

Nor is Japan alone in this regard. The central banks of Sweden, Switzerland, Denmark, and the European Central Bank have all recently adopted negative interest rates in an attempt to return inflation to positive territory and stimulate economic growth.

For the time being, the impact of these new rates has been limited, with only large corporate depositors effected thus far, though banks will likely be forced to apply them to small account holders as well in the future.

While the prospect of being charged for what essentially amounts to loaning money to the bank seems strange, it could be the new norm in Israel as well if monetary trends don’t change soon. 

Last year the Bank of Israel lowered its interest rate to 0.1%, the lowest in its history.  If the deflation in the shekel isn’t halted soon, the Bank very well may push interest rates into negative territory later this year.

Source: http://www.israelnationalnews.com/News/News.aspx/208105

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