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ADBI Annual Conference 2016: The Implications of Ultra-Low and Negative Interest Rates for Asia
Tokyo, Japan
December 2, 2016
Disclaimer. The views presented here are those of the authors and do
NOT necessarily reflect the views and policies of the World Bank Group
or of any other institution they are affiliated with.
A Polarized Debate on NIRP
[In] the first full year with negative interest rates, [banks net interest
income] went up. [] So all in all the [NIRP] experience has been
positive
Mario Draghi, April 2016
2
Countries with NIRP Sizeable:
25% of World GDP!
Policy interest rates Size of economies with negative rates
(Percent) (Percent of world GDP)
3 30
Euro Area Sweden Policy rate
Japan Switzerland
Denmark Hungary 5 year bond yield
2
20
10
0
-1 0
Jan-14 Sep-14 May-15 Jan-16 Sep-16 Jan-14 Jan-15 Jan-16 Latest
Sources: European Central Bank, Haver Analytics, Bloomberg, World Bank.
Left Panel: Policy rates are the following: overnight deposit facility (Euro Area), repo rate (Sweden), current account deposit (Japan), middle point of target range for three-
month LIBOR (Switzerland), one-week certificate of deposit (Denmark), overnight deposit (Hungary). Last observation is October 2016. Right Panel. Share of world GDP 3
in current US$ for 2015 accounted for by economies with negative policy rates and 5-year government bond yields. Monthly averages. Latest month is October 2016.
Three Questions
4
Three Questions
5
Interest Rates and Currencies since NIRP:
Declines in Interest Rates; Mixed in Currencies
Changes in interest rates since NIRP Nominal effective exchange rates
(Percentage points) (Percent)
0 15
-0.2 10
-0.4 5
-0.6 0
Change since June
-0.8 -5 2014
Deposit (HH) Lending (HH)
Change since first
2-year bond yields Money market rate announcement
-1 -10
Denmark
Japan
Denmark
Japan
Sweden
Sweden
Switzerland
Hungary
Switzerland
Hungary
Euro Area
Euro Area
0 0
-2 -2
-4 -4
1-month 3-month 2-year 10-year NEER
interbank rate interbank rate government government (RHS)
bond yields bond yields
Sources: Bloomberg, Haver Analytics, national central banks, World Bank.
Note: Basis points or percentage difference between closing values on the day before the NIRP announcement and those on the day of the announcement. Pooled average 7
and median across NIRP announcements. The effective exchange rate is a trade-weighted index of bilateral exchange rates. A decrease indicates a depreciation.
Three Questions
1 What happened since NIRP? Declines in money market and lending rates, bond
yields; Mixed movements in currencies
8
Bank Lending Margins since NIRP:
Little Change
Margins on household lending Margins on corporate lending
(Percentage points) (Percentage points)
12 5
Range from 2010-present Range from 2010-present
Pre-NIRP 4 Pre-NIRP
9 Latest
Latest
3
6
2
3
1
0 0
Sweden
Sweden
Spain
Spain
Denmark
Denmark
France
Germany
Germany
France
Hungary
Hungary
Source: European Central Bank.
Note: Lending margins are measured as the difference between rates applied to new household/non-financial corporation loans and weighted average rates applied to new 9
deposits from households/non-financial corporations. Latest observation is September 2016.
Views from Euro Area Banks:
Significant Pressure on Bank Profitability
ECB Survey: Impact of NIRP on bank profitability
(Net percent of respondents)
30
-30
-60
Past six months Next six months
-90
Net interest Lending Lending Lending Non-interest
income margin rate volume charge
Source: European Central Bank.
Note: Results from the European Central Banks Bank Lending Survey (BLS) October 2016. Net percent is defined as the difference between the sum of the percentage for
increased considerably and increased somewhat and the sum of the percentages for decreased somewhat and decreased considerably". It answers the following
question: Given the ECB's negative deposit facility rate, did or will this measure, either directly or indirectly, contribute to: 1- a decrease/increase of your bank's net
interest income, 2- a decrease/increase of your bank's lending rates, 3- a decrease/increase of your bank's loan margin (narrower spread = decrease; wider spread = increase), 10
4- a decrease/increase of your bank's non-interest rate charges, 5- a decrease/increase of your bank's lending volume, over the past or next six months?
Banking and Insurance Company Equities:
Declining Sharply
Banking sector equities Insurance company equities
(Index, January 1, 2014 = 100) (Index, January 1, 2014 = 100)
150 150
125 125
100 100
75 75
World World
Euro Area Euro Area
Japan Japan
50 50
2014 2015 2016 2014 2015 2016
Source: Bloomberg.
Note: MSCI banking sector index (Left Panel) and insurance sector index (Right Panel) for each region/country, normalized to 100 on January 1, 2014. Last observation is 11
November 25, 2016.
Inflation and Credit after NIRP:
Disappointing Inflation; Mixed Credit Response
Inflation forecasts for 2016 Credit growth
(Percent, year-on-year) (Percent, year-on-year)
3 6
Latest Latest Pre-NIRP
January 2015
2 4
1 2
0 0
-1 -2
Switzerland
Japan
Denmark
Euro Area
Sweden
Denmark
Japan
Sweden
Switzerland
Sources: World Bank, Consensus Economics, Haver Analytics.
Euro Area
Left Panel. Inflation forecasts for 2016 in January 2015 and in the latest month when data are available (November 2016). Right Panel. Year-on-year growth in credit to the 12
non-financial private sector. Latest observation is September 2016 for all countries except for Switzerland (August).
Three Questions
13
NIRP: Benefits and Risks for EMDEs
Risks. Due to dollar appreciation, higher cost of debt servicing and broader
balance sheet pressures Due to large inflows, credit and asset price
booms
14
Monetary Policy in Advanced Economies:
Diverging Prospects
Policy rate expectations
(Percent)
2
Dashed line: February 2016
1.5 Solid line: September 2016
1 United States
0.5
Euro Area
Japan
0
-0.5
2016 17 2018 2019 2020 2021
Sources: World Bank, Bloomberg.
Note: Policy rate expectations derived from overnight indexed swaps: Euro Overnight Index Average for ECB; Tokyo Overnight Index Average for Japan; Federal Fund 15
Rate for the United States.
NIRP Announcements on EMDE Assets:
Falling Spreads, Appreciating Currencies, Rising Equities
NIRP announcements: effect on EMDE aggregates over one-day window
(Basis points) (Percent)
20 0.8
Average Median
10 0.4
0 0
-10 -0.4
EMBI spreads Exchange Equity
rate (RHS) prices (RHS)
Sources: J.P. Morgan, Bloomberg, Haver Analytics, World Bank.
Note: Basis points or percent difference between closing values on the day before the NIRP announcement and those on the day of the announcement. NIRP announcements
are those of the European Central Bank, the Bank of Japan, and that coinciding with the Swiss National Banks decision to abandon the Francs floor against the Euro.
Exchange rate is the JP Morgan EM Foreign Exchange Index, EMBI spread is calculated as the average premium paid over a U.S. government bond with comparable 10 16
maturity, and equity prices are the MSCI Emerging and Frontier index.
NIRP Announcements on Assets in Asia:
Declining Yields, Appreciation, Increasing Equities
Bond yields Exchange rates Equity indices
(Basis points) (Percent) (Percent)
0 0.4 1.2
Average Average
0.3 Median 0.9 Median
-2
0.2 0.6
0.1 0.3
-4 Average
Median 0 0
-6 -0.1 -0.3
India
China
India
China
India
China
Indonesia
Indonesia
Indonesia
Sources: J.P. Morgan, Bloomberg, Haver Analytics, World Bank.
Note: Basis points or percent difference over on-day window between closing values on the day before the NIRP announcement and those on the day of the announcement.
NIRP announcements are those of the European Central Bank, the Bank of Japan, and that coinciding with the Swiss National Banks decision to abandon the Francs floor
against the Euro. Left Panel: Bond yields are for 10-year government bonds. Center Panel. Exchange rates are nominal effective exchange rates and a decrease indicates 17
depreciation. Right Panel. Equity indices are the main stock market indices for respective countries, expressed in local currency.
Equity Prices and Currencies in EMDEs:
Expected Movements?
EMDE equity indices Nominal effective exchange rates
(Index, January 2, 2012 = 100) (Index, January 2012 = 100)
200 120
Commodity importers
Commodity exporters
150 110
100 100
Equities
Banks
Insurance companies
50 90
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
Sources: Bloomberg, Haver Analytics, World Bank.
Left Panel: MSCI emerging market indices. Last observation is November 25, 2016. Right Panel: Simple averages of 4 commodity-exporting ADB developing members
and 7 commodity-importing ADB developing members. Commodity exporter classification is taken from the World Bank Global Economic Prospects. Last observation is 18
September 2016.
Growth in EMDEs:
Slowing Growth in Asian Economies
Real GDP growth
(Percent)
10
1990-2008 Average 2003-08 Average
8
0
2012
2014
2013
2011
2012
2013
2014
2015
2016
2011
2013
2014
2015
2016
2011
2012
2013
2015
2016
2011
2012
2014
2015
2016
EMDEs ADB developing ADB members ADB members
members (commodity (commodity
exporters) importers)
Source: World Bank.
Note: Weighted average output growth. The numbers for 2016 are forecasts. Data are available for 17 commodity-exporting ADB developing members and 25 commodity- 19
importing ADB developing members.
Policy Space in Asian Economies:
Narrowing in Commodity Exporters
Fiscal balance Policy interest rate
(Percent of GDP) (Percent)
4 10
0 8
-2
6
-4
-6
4
-8 Commodity exporters
2015 2016 2015 2016
Commodity importers
Commodity Commodity 2
exporters importers 2010 2012 2014 2016
Sources: International Monetary Fund, Haver Analytics, World Bank.
Left Panel: Median level of fiscal balance as a share of GDP. Yellow bars represent interquartile ranges. Data are available for 18 commodity-exporting ADB developing
members and 25 commodity-importing ADB developing members. Right Panel. Average policy interest rates based on 13 commodity-exporting and 15 commodity- 20
importing ADB developing members. Last observation is 2016Q3.
Policy Options for EMDEs
21
Three Questions
1 What happened since NIRP? Declines in money market and lending rates, bond
yields; Mixed movements in currencies
22
Key Messages
Modest benefits possible. If policy interest rates are slightly negative and
they are not employed for too long.
Naotaka Sugawara
Development Prospects Group
The World Bank
nsugawara@worldbank.org