"The jury remains to be not there due to damaging rates of interest," says the previous head of the Indian central financial institution


Rajan Raghuram at Jackson Hole, Wyoming August 24, 2018.

David A. Grogan | CNBC

LONDON – According to former Reserve Bank of India Governor Raghuram G. Rajan, the "jury is still undecided over negative interest rates" as central banks look for ways to protect the global economy from the long-term effects of the coronavirus pandemic.

In a panel moderated by CNBC at the World Economic Forum's (WEF) Jobs Reset Summit, Rajan suggested that central banks, which have been putting in place unprecedented monetary stimulus measures since the beginning of the pandemic, are ready to tolerate more inflation for a short while, however, it should the extent to which various measures help or damage the economy in the long term are taken into account

Interest rates have been aggressively lowered by central banks around the world, with many now hovering at or near zero and others moving into negative territory, like the European Central Bank and the Bank of Japan. The Bank of England last week asked lenders for information about their readiness for the option of zero or negative interest rates.

"As for negative interest rates, the jury is still not there. In fact, Sweden got back from negative interest rates pretty quickly and won't be going back there, maybe because they feel it wasn't that successful," said Rajan, now Katherine Dusak Miller, distinguished service professor of finance at the University of Chicago's Booth School of Business, said CNBC's Geoff Cutmore.

With a second wave of Covid-19 cases in Europe and the US continuing to grapple with increasing infections, central banks and governments are now beginning to seek more targeted responses to give their respective economies the firepower to weather the crisis .

Rajan noted that an important shift in focus has been on securing credit supplies, particularly to the private sector and small and medium-sized businesses, in industries particularly hard hit by the pandemic and related lockdowns. However, he argued that they need to assess which new strategies are useful in the long term and which "stand in the way of change".

"Are we putting too much debt into the system? Is it time to inject some equity into the system? Is it time to shut down some businesses so their resources can be used elsewhere?" Said Rajan.

"These are the questions that central banks and the governments that back them with some of these loan guarantees will have to ask themselves after this first wave of support as the pandemic has been going on."

Rain Newton-Smith, chief economist at the Confederation of British Industry (CBI), told the panel that while monetary policy now needs to be more targeted, fiscal policy will have to do the heavy lifting in this second wave of support.

"Some of the loopholes that we saw early on that we needed to fill were in the way you lend to companies that may never have taken out a loan before," Newton-Smith said.

"Unlike the global financial crisis where the financial sector crisis began and affected the real economy, you had a health crisis here and the way we had to address it really had an impact on companies of all sizes."

She suggested that during the second wave, fiscal responses should be more dynamic and adaptable. Using the examples of similarities between job security systems in France, Germany and the UK, she argued that more collaborative learning across borders could support the long-term response to the crisis.

Other long-term strategies that Newton-Smith said need to come to the fore would be further emphasis on transitioning to a low carbon economy and a different future for energy and mobility, using both public and private funding, along with a renewed focus on competition.

She insisted that it was important to ensure that the pandemic response, which relied on traditional financial institutions to "fill the gap on the other side of the crisis," does not inadvertently open the door to competition from fintech and others closes smaller institutions.


Katherine Clark