Many central banks, notably the European Central Bank, still have a negative interest rate policy or NIRP.
Basically, this zero-bound monetary policy urges companies and consumers to put their money to work in the economy or the stock market.
But here’s a chart that shows the negative consequences of that policy for European financials versus their counterparts in the U.S., where the Federal Reserve refused to indulge in negative rates.
by Charlie Bilello, Founder & CEO, Compound Advisors
For those arguing that interest rates should be held at 0% forever or cut even further into negative territory, the following data point may be instructive.
Since the ECB implemented negative rate policy more than seven years ago, European Financials ($EUFN) are down 2% versus a 138% gain for U.S. financials ($XLF).
The lesson? Just because a central bank can do something, doesn’t mean they should. There are unintended consequences to everything, including excessive easy money and negative rates.