A study published ahead of the IMF’s spring meeting in Washington DC alongside the World Bank, has concluded that on balance, negative interest rates “help deliver additional monetary stimulus and easier financial conditions, which support demand and price stability.”
“Still, there are limits on how far and for how long negative policy rates can go … both in terms of the extent to which central banks can set rates at negative levels and the length of time they can remain negative,” Jose Vinals, Simon Gray and Kelly Eckhold from the IMF said.
Restrictions on the use of negative interest rates - currently being used by six central banks - centred not only on a de facto ‘floor’ for how low they could go before people started hoarding cash, but also on the impact negative rates would have on savers, investors and pensioners along with what the IMF called “significant political economy and social limits”.
“The public may feel that they are being ‘taxed’ if and when deposit rates increasingly turn negative,” researchers warned, as they estimated that the effective basement for negative rates could be anywhere between minus 0.75 - minus two per cent, depending on the country.
“There may also be excessive risk-taking. As banks margins are squeezed, they may start lending to riskier borrowers to maintain their profit levels … Weak loans could become harder to detect, and vital corporate restructuring could be delayed.”
|Country & central bank||Deposit rate|
|Hungary (National Bank of Hungary)||minus 0.05 per cent|
|Japan (Bank of Japan)||minus 0.1 per cent|
|Eurozone (European Central Bank)||minus 0.4 per cent|
|Denmark (Danish National Bank)||minus 0.65 per cent|
|Switzerland (Swiss National Bank)||minus 0.75 per cent|
|Sweden (Swedish Riksbank)||minus 1.25 per cent|
Perhaps most worryingly, the IMF also said that “negative interest rates may induce boom and bust cycles in asset prices.”
“These potential risks require close monitoring and supervisory scrutiny,” the Fund concluded, but confirmed that it “support[s] the introduction of negative policy rates … given the significant risks we see to the outlook for growth and inflation.”