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The dangers in negative interest rates

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US Federal Reserve chair Janet Yellen told US lawmakers that negative interest rates were "not off the table" as a possible tool in the future if, against her expectations, the American economy turned down. London-based Fidelity Global Focus Fund portfolio manager Amit Lodha warns that from an equity investor's perspective, negative rates can be detrimental. "If we are going into a negative interest rate environment, it's telling corporates that money is for free and you can do whatever you want with that money," Mr Lodha said. "That sets up a very wrong capital allocation incentive framework that will cause problems in the future." Artificially cheap money helps prop up underperforming companies, rather than allowing a natural economic adjustment where stronger companies can crush weak competitors. "When money is so cheap you keep a lot of zombie companies alive who otherwise would have gone bust," Mr Lodha said. "This actually makes life much tougher for the rest of the corporate sector." (VIEW LINK) (AFR subscription required)


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