Investment Institute
Macroeconomic Research

The brave new world of negative interest rates

  • 09 March 2016 (3 min read)

Several central banks have started to introduce negative interest rate policies (NIRP). Whether NIRP is a reflection of despair among policymakers failing on their mandate or a smart policy innovation has sparked debate.

Key points

  • Five central banks have introduced negative interest rates, triggering significant debates about their relative costs and benefits.
  • Implementation has been smooth so far and rate cuts have been channelled to the economy through currencies and financial markets.
  • A major concern revolves the potential hit to banks’ profitability from lower net interest income. In our view, negative rates will ultimately be passed to customers if they persist.
  • The effectiveness of negative rates is limited as long as physical cash is not taxed. Operational hurdles are surmountable, but political opposition is  a key unknown.
  • Most risks associated with negative rates will only emerge over time. This supports a short, aggressive response from central banks, as opposed to gradualism.

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