Bank of America Merrill Lynch Research argues that it's time to get rid of negative policy rates, noticing that central banks with negative rates should not be concerned about currency strength if they bring rates to zero, particularly if they strengthen forward guidance instead.
"Two key developments have happened this fall that makes us believe that this is a great opportunity for central banks to get rid of negative rates, without being concerned about a strong currency, given the side effects," BofAML notes.
"First, the ECB cut depo rates even deeper into negative territory in September and EUR did not respond. Up to an extent tiering may have offset the impact of the depo rate cut, but if this is the case, then why cut in the first place? Second, the Riksbank signaled in its October meeting that it wants to bring rates back to zero, despite weak data, because of concerns from negative side effects, at the same time strengthening forward guidance promising to keep rates at zero for longer, and SEK also did not react much: the market has now priced the hike fully. In both cases, the currencies weakened sharply when the central banks introduced negative rates and remain at such low levels. However, it is now clear to us that negative rates (and bringing rates back to zero) do not affect FX anymore, at least not to the same extent as when they were introduced," BofAML adds.