El-Erian Warns Negative Rates Are Wrong Prescription

The longer negative interest rates persist, the greater the damage to the world financial system, Allianz Chief Economic Adviser Mohamed El-Erian said Monday.

With “low and even” world growth, “you’re going to see central banks, particularly in Japan and Europe, try to do even more to boost their economies, said El-Erian. “The system isn’t build to operate with negative nominal rates.”

Negative rates prevent services such as insurance companies and pensions to get the yields they need to thrive, not to mention the chilling effect negative rates have on savers, he said on CNBC’s “Squawk Box.”

“We’re going to have an impaired financial system,” he said. “It means fewer long-term financial services that are credible for society.”

El-Erian also cited a high political risk to negative rates: “That’s something people can identify with. It looks absurd. What do you mean, I’m going to lend to my money and I’m going to pay you interest? Give me a break.”

Leaders in Japan and Europe need to get their fiscal houses in order to take pressure off central banks, he said.

“Central banks are like doctors, they never walk away from the patient,” El-Erian said. “Even though they haven’t got the right medicine, they will continue prescribing.”

via CNBC

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, he established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza