The brave new world of negative interest rates
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.
- 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.