Abrupt
changes in the policies of the world’s largest central banks have rippled
through smaller economies, leaving them with the prospect of low and even
negative interest rates for years to come despite having mostly
healthy economies.
The
danger is that these easy-money policies could fuel destabilizing bubbles in
real estate and other asset markets. They may also leave banks with little
ammunition to respond to the next economic downturn.
Economies
like Switzerland’s, whose central bank signaled no change in its negative-rate
policies for years to come, are small compared with the U.S. and eurozone.
Still, they are home to major global banks and companies that are sensitive to
exchange rates and financial conditions. With financial markets so
interconnected, problems in small countries can quickly spread to larger ones.
On
Wednesday, the Federal Reserve left its key policy
rate in a range between 2.25% and 2.5% and indicated that it is
unlikely to raise rates this year. In late 2018, officials had signaled they
expected between one and three increases this year.
Two
weeks ago, the European Central Bank went further, saying it
would launch new stimulus to support the eurozone economy via cheap
loans for banks. It also said it expected to keep its key interest rate at
minus 0.4% at least through 2019, a longer horizon than before.
The
Swiss National Bank said
Thursday that it would keep its policy rate at minus 0.75%, where it has been
since January 2015, and reduced its inflation forecast to 0.3% this year and
0.6% in 2020. The SNB cited weaker overseas growth and inflation and “the
resulting reduction in expectations regarding policy rates in the major
currency areas going forward.”
Norway’s
central bank took an opposite turn, raising its policy rate by 0.25 percentage
point to 1% and signaled more increases this year. Norway’s reliance on oil
production sets it apart from other European countries because higher oil
prices provide a stimulus to its economy that its neighbors don’t receive. Its
currency, the krone, rose about 1% against the euro after its decision.
Still,
Norway’s bank lowered its long-term rate forecast, citing “a more gradual
interest rate rise among trading partners.”
Norway’s
central bank may not be alone in raising its key interest rate this year. While
leaving its key rate unchanged Thursday, the Bank of England reaffirmed its
expectation that “an ongoing tightening of monetary policy” will be needed if the U.K. leaves the European Union on
agreed terms and with a period in which to adjust to new trading terms. But it
also acknowledged that should Brexit be abrupt, a cut in its key rate might be
needed.
Here’s
why Fed and ECB decisions matter for countries that don’t use the dollar or
euro: Switzerland and countries near the eurozone but not part of it—like
Sweden and Denmark—rely on the bloc for much of their exports and imports. That
makes growth and inflation highly dependent on the exchange rate. Central-bank
stimulus tends to weaken a country’s exchange rate, so when the ECB embraces
easy-money policies as it did two weeks ago it tends to weaken the euro against
other European currencies such as the Swiss franc. Because the ECB is so large,
Switzerland and others can do little to offset it
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