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Negative rates—a mistake to start—cause 'collateral damage': Allianz's El-Erian

Collateral damage of negative rates: El-Erian

The negative interest rate experiment undertaken mostly notably by the European Central Bank and the Bank of Japan has failed, Allianz Chief Economic Adviser Mohamed El-Erian told CNBC on Wednesday.

"I think they shouldn't have gone there but they did. I think [policymakers] are now realizing that the collateral damage of negative rates far exceed the benefits," the former co-CEO of Pimco said on "Squawk Box."

Negative interest rate policy, or NIRP for short, is designed to get consumers and businesses to spend money rather than save it, and to spur banks to lend money more freely.

"[But] in fact, you get counterintuitive results," El-Erian contended. "People save more. The financial system starts fermenting."

The ECB first introduced negatives rates in June 2014. The BOJ followed suit in February.

Despite indications that NIRP doesn't work, El-Erian said policymakers were loathe to admit their mistakes. "I don't think they give it up. But they don't press it any further. They'll use more QE."

Both the ECB and the BOJ have also implemented aggressive quantitative easing asset purchases, aimed at stimulating growth.

While much of the world remains firmly in easing mode, the Federal Reserve is looking for the right time to increase U.S. interest rates again. The Fed hiked rates for the first time in more than nine years in December.

In Wednesday's CNBC interview, El-Erian also warned that slow economic growth could turn into recession if Washington can't break the political gridlock and step up with meaningful fiscal reform.

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