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Negative interest rates mean ‘unknown consequences’

Recent experiments with negative interest rates by central banks could end up doing the global economy “more harm than good”, according to a global investment management firm.

In a note to investors, Pimco chief investment officer for US core strategies, Scott Mather, pointed to the “unknown consequences” of negative interest rate policies.

The Bank of Japan moved official interest rates into negative territory in late January 2016, following the European Central Bank in 2014 and joining the likes of Denmark, Sweden and Switzerland, Mr Mather said.

“Now it seems the [US Federal Reserve] may be warming to the idea, having gone beyond supportive innuendo to subtle preparation for potentially engaging in [negative interest rate policy],” he said.

However, Mr Mather said the efficacy of negative rates on growth or inflation is “far from certain”, and policymakers may have “significantly underestimated the economic risks”.

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“Negative interest rates may be a central bank tool that is increasingly ineffective at boosting growth and inflation, and may pose more risk to the financial system than is commonly understood,” he said.

“It could very well be that a return to more normal monetary policy rates would beget a return to more normal economies with normal inflation expectations.

“Even if that were not to be the case, monetary policies more focused on easing financial conditions by lowering credit and equity risk premiums directly ... may prove far more effective.

“Negative interest rate policies ... have many unknown costs and risks and, to date, have done more harm than good.”

[Related: 'Be alert to the risk of a recession', says global firm]

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