## nirtsesfea ## Source details **Canonical URL:** [nirtsesfea](https://www.imf.org/-/media/files/publications/dp/2021/english/nirtsesfea.pdf) ## Other formats - [Markdown version](/-/media/files/publications/dp/2021/english/nirtsesfea.pdf.md) - [Structured JSON version](/-/media/files/publications/dp/2021/english/nirtsesfea.pdf.json) --- ### Executive Summary — context and purpose - Starting in 2012 several central banks introduced negative interest rate policies (NIRP) to provide additional stimulus when conventional policy space was exhausted. - This departmental paper takes stock of experience with NIRP, summarizes evidence since IMF (2017), and focuses on NIRP’s effects across households, firms, banks, asset prices, and the macroeconomy. ### Transmission and asset-price effects - Money market rates - Money market rates tracked policy rates closely as policy rates moved below zero. - No substantial disruption in money markets has been observed to date. - Long-term yields - NIRP contributed significantly to declines in longer-term yields, especially after initial cuts below zero; some decline also reflects coincident APPs and enhanced forward guidance. - IMF estimates show term premiums have fallen to about –1 percent at their lowest point since 1998. - Deposit and lending rates - Deposit rates for non-retail (corporate) customers have fallen more than retail deposit rates. - Retail depositors exhibited a stronger ZLB for deposit rates; banks reacted in part by raising fees on retail deposit accounts. - Some lending rates have fallen, though confounding policies (for example, TLTROs) complicate attribution. ### Bank behavior, lending, and profitability - Lending volumes - Bank lending volumes have generally increased in jurisdictions implementing NIRP, supporting investment and demand. - Banks with more liquid assets and greater access to wholesale funding tend to increase lending more after NIRP. - Profitability and distributional effects - For the most part, bank profits have not significantly deteriorated due to increased lending, fees, and realized capital gains. - Smaller and more specialized banks, and banking systems with heavier reliance on deposit funding and larger holdings of very liquid assets, have experienced weaker lending responses and larger negative impacts on profitability. - Evidence is mixed: some studies find significant NIM compression and profit declines; others find offsets from non-interest income and lower provisions. - Mechanisms and heterogeneity - Net effect depends on deposit funding share, dependence on net interest income, share of liquid assets, pricing power, and benefits from higher asset values and improved loan performance. - At the time of NIRP adoption, deposit shares ranged from 15 percent in Denmark to nearly 70 percent in Japan. ### Cash usage and vault cash - No evidence of a widespread increase in household or corporate cash holdings in countries implementing NIRP to date. - Vault cash - Euro area MFIs’ vault cash remained stable during initial NIRP announcements but rose significantly from 2016 when the ECB lowered a key policy interest rate to –40 basis points. - Vault cash has been increasing in the United States despite policy rates remaining positive. ### Macro effects: output and inflation - Overall assessment: NIRP has likely supported growth and inflation, though evidence is sparse and disentangling NIRP from concurrent UMP is challenging. - Magnitude (selected estimates) - Rostagno and others (2019): unconventional monetary policies over 2015–18 had a combined effect of about 2.7 percent on GDP and one-third of a percentage point on inflation; about one-fifth of the overall impact is assigned to NIRP. - Implied: a staggered 50 basis point rate cut yields about 0.5 percent increase in GDP and 0.07 percent point increase in inflation (in the referenced decomposition). - QE counterfactual estimates: a 100 basis point drop in long-term rates associated with GDP and CPI effects varying by country (examples preserved in source). ### Financial stability and search-for-yield concerns - Low-for-long rates create concerns (search-for-yield, lower bank profitability), but evidence does not indicate NIRP per se has compounded these effects to date. - Risks remain if NIRP persists long or cuts go deeper into negative territory; reversal rate is an important concept (see below). ### Limits, uncertainties, and open questions - Effective Lower Bound (ELB) - ELB is the technical minimum below which agents would switch to cash; estimates have been revised downward in many countries. - Federal Reserve Board staff estimated short-term rates could not be driven below –30/–35 basis points without triggering large withdrawals of reserves (Burke and others 2010). - Canada estimates: ELB between –25 and –75 basis points with midpoint –50 basis points (Witmer and Yang 2015). - Central Bank of Chile stated the “technical minimum for its policy rate was 50 basis points.” - Absence of a flight to cash at moderately negative rates suggests ELB may be deeply negative, perhaps below estimates of about –0.5 to –0.75 percent and possibly as low as –2 percent (Lilley and Rogoff 2019). - Reversal rate - The reversal rate is the policy rate beyond which negative rates seriously impair financial intermediation and pass-through; its location is unknown and may lie above, at, or below the ELB. - Darracq Pariès, Kok, and Rottner (2020) suggest the reversal rate may be at or below –1 percent for jurisdictions studied; empirical validation is lacking. - Heterogeneity and political/institutional constraints - Country-specific financial structure, legal authority to impose negative rates, prevalence of CNAV MMFs, and political acceptability strongly influence feasibility and depth of NIRP. - Unknowns - Longer-run impacts on bank profitability, lending behavior of smaller or specialized banks, nonbank intermediaries (pension funds, insurers, MMFs), and cross-border flows remain uncertain. ### Political economy and institutional constraints - Adoption drivers and constraints - Lack of authority to charge interest on reserves and perceived financial-stability costs can prevent adoption. - Economies with constituencies perceived to lose from negative nominal rates face political resistance. - Communication and expectations - If markets internalize that rates can be negative, expected rates at longer horizons fall, magnifying NIRP’s loosening effect—particularly for countries with low but positive current rates. ### Policy implications and recommendations - Keep NIRP in the toolkit: central banks should not rule out NIRP and should retain it as an option. - Use contingent on system structure: scope for deploying or deepening NIRP depends on banking system characteristics (retail deposit reliance, bank size/specialization, holdings of liquid assets). - Monitor and manage risks: vigilance on bank profitability, lending behavior of small/specialized banks, cash trends, and search-for-yield pressures is essential. - Mitigation tools - Tiering reserve regimes: several central banks use exemption/tiering to remunerate a share of reserves at higher rates; Japan’s 3-tier system is a notable example. - TLTROs and targeted funding can soften side effects by reducing intermediaries’ funding costs. - Communication recommendations - Explain expected benefits and likely size of potential side effects of modestly negative rates. - Push back against a perceived “red line” at zero; stress continuous monitoring and readiness to alleviate side effects. - Tailor “tiered” or “targeted” communications to stakeholder economic literacy. ### Chapter 2 — literature, conceptual issues, and mechanisms - Why seek negative policy rates - Declining neutral real rates and inflation targets near 2 percent have made nominal rates low; achieving sufficient stimulus can require policy rates below zero. - Interaction with other UMPs - NIRP can reinforce forward guidance and APPs via signaling; APPs increase reserves and can increase NIRP’s burden on bank profits. - Behavioral and institutional frictions - Cash creates a technical minimum (ELB); storage and insurance costs mean zero is not an absolute lower bound. - Prospect theory and aspiration-level theory imply first cuts into negative territory may produce outsized behavioral responses; expected utility theory may predict opposite effects via wealth channels. - Nonbank effects - MMFs face redemptions and CNAV sustainability issues; life insurers and liability-driven investors may increase risk-taking or demand negative-yielding safe assets. - Cross-border spillovers - NIRP can boost global asset prices and generate capital flows to EMDEs; effects on currency denomination of international bank flows and exchange-rate sensitivity are important. ### Empirical evidence and key country case studies (selected findings) - Denmark - July 2012: cut into negative territory to defend krone peg; since 2017 negative rates increasingly transmitted to deposit and lending rates. - 10-year mortgages issued at rates as low as –0.5 percent. - At adoption, some commercial banks charge the benchmark rate (–0.75 percent) on corporate and moderate-size retail deposits. - Bank profits have not suffered materially due to adaptation and fee-income increases. - Euro area - ECB introduced NIRP June 2014: deposit facility to –0.10 percent, later to –0.50 percent by September 2019. - ECB introduced two-tier reserve remuneration (exempt up to six times reserve requirement at 0 percent) in September 2019. - Evidence indicates fast and effective transmission to money markets, yields, and lending rates; Boucinha and Burlon (2020) provide evidence of support to activity and price stability. - Japan - BOJ announced NIRP January 29, 2016 (implementation February 16, 2016) on excess reserves and used a three-tier reserve remuneration system. - NIRP flattened the yield curve and contributed to BOJ adopting Yield Curve Control (September 2016). - NIRP stimulated activity and inflation but did not achieve 2 percent target alone. - Sweden - Repo rate reached –50 basis points in 2016–2019; Riksbank exited NIRP in December 2019 back to zero; deposit rate remained –10 basis points as of January 2021. - Swedish banks cut deposit and lending rates; pass-through to deposit rates weakened with successive cuts. - Switzerland - SNB set deposit rate to –0.75 percent; combined NIRP with large FX intervention. - Low pass-through to deposit rates and muted initial transmission to lending rates; exchange-rate channel was key. ### Conclusions — synthesis and guidance - Empirical experience so far - Many theoretical adverse effects have not materialized strongly to date: transmission mechanisms broadly resemble conventional cuts, and bank profitability has not significantly suffered on average. - The reversal rate remains theoretical and likely not yet breached in jurisdictions implementing NIRP. - Retain NIRP as option - Central banks should not rule out temporary cuts into negative territory; allowing this possibility can lower long-term yields via expectation effects. - Limits and potential escalation - Deeply negative rates might be effective temporarily; very negative rates could require extreme measures (for example, taxes on cash or elimination of large denomination bills). - Prolonged negative rates could elicit political pushback and stronger side effects, especially for nonbanks and retail depositors. *Italic: Executive Summary and chapter excerpts — nirtsesfea (departmental paper).* ### Executive Summary ������������������������������������������������������������������������������������������������������ ### Executive Summary ### Context and purpose - Starting in 2012 several central banks introduced negative interest rate policies (NIRP), raising questions about transmission to other rates, cash hoarding, lending, money market functioning, and financial stability. - This departmental paper takes stock of the experience with NIRP so far, summarizes evidence accumulated since IMF (2017), and focuses specifically on NIRP’s effects across households, firms, banks, asset prices, and the macroeconomy. ### Transmission and asset-price effects - Money market rates: NIRP transmission has been most visible in money market rates; money market rates tracked policy rates closely as policy rates moved below zero. - Long-term yields: NIRP contributed significantly to declines in longer-term yields, especially following the initial rounds of cuts pushing policy rates below zero; some of the decline also reflects coincident APPs and enhanced forward guidance. - Deposit and lending rates: - Deposit rates for non-retail (corporate) customers have fallen more than retail deposit rates. - Corporate deposit rates declined more because it is costlier for companies to switch into cash. - Retail depositors exhibited a stronger ZLB for deposit rates, and banks reacted in part by raising fees on retail deposit accounts. - Some lending rates have fallen, though measurement is complicated by confounding policies (for example, TLTROs in the euro area). - No substantial disruption in money markets has been observed to date. ### Bank behavior, lending, and profitability - Lending volumes: Bank lending volumes have generally increased in jurisdictions implementing NIRP, supporting investment and demand. - Profitability: - For the most part, bank profits have not significantly deteriorated due to increased lending, fees on deposit accounts, and realized capital gains. - Smaller and more specialized banks, and banking systems with heavier reliance on deposit funding and larger holdings of very liquid assets, have experienced weaker lending responses and larger negative impacts on profitability. - The absence of significant deterioration in profitability may largely reflect shorter-term effects; adverse longer-term effects remain a possibility. - Funding and balance-sheet composition matter: Systems with retail-oriented deposit funding constrain scope for deeper negative rates because retail deposit rates appear to face a ZLB. ### Cash usage and vault cash - No widespread increase in household or corporate cash holdings has been observed in countries implementing NIRP. - Vault cash: - Euro area MFIs’ vault cash remained stable during initial NIRP announcements but started to rise significantly from 2016 when the ECB lowered a key policy interest rate to –40 basis points. - Vault cash has been increasing in the United States despite policy rates remaining positive. ### Macro effects: output and inflation - Overall assessment: NIRP has likely supported growth and inflation. - Magnitude: Evidence is sparse and disentangling NIRP from concurrent UMP measures is challenging, but: - For the euro area, NIRP appears to have had small but positive effects on inflation and growth and boosted corporate investment. - In Japan, NIRP may have supported the economy via the exchange rate channel. - Comparability: The available evidence suggests effects of NIRP on inflation and output may be comparable to conventional interest rate cuts or other UMPs. ### Financial stability and search-for-yield concerns - Low-for-long interest rate environment creates financial stability concerns (search for yield, lower bank profitability), but evidence does not indicate that NIRP per se has compounded these effects to date. - Risks remain if NIRP persists for a long time or rates are cut further into negative territory. ### Limits, uncertainties, and open questions - Effective lower bound (ELB): Estimates of how low policy rates can go before encouraging a wholesale switch to cash (ELB) have been revised downward across countries. - Reversal rate: The policy rate beyond which negative rates seriously impair financial intermediation (the reversal rate) remains unknown. - Heterogeneity: Country-specific financial system structure, legal/institutional constraints, and political economy considerations strongly influence the feasibility and depth of NIRP. - Long-term effects: The longer-run impact on bank profitability, lending behavior of smaller or specialized banks, and broader financial stability is still uncertain. ### Political economy and institutional constraints - Adoption drivers: - Institutional/legal constraints (for example, lack of authority to charge interest on reserves) may prevent some central banks from implementing NIRP. - Specific features of the financial system that heighten financial stability concerns can deter adoption. - Political acceptability: Economies with constituencies that may lose from negative nominal interest rates (in reality or perception) face greater political resistance. - Communication and market expectations: If markets internalize that rates can be negative, expected rates at longer horizons fall, magnifying the loosening effect of NIRP—particularly for countries with low but positive current rates. ### Policy implications and recommendations - Keep NIRP in the toolkit: Central banks should not rule out NIRP and should keep it as part of their toolkit even if they are unlikely to use it. - Use contingent on system structure: The scope for deploying or deepening NIRP depends on banking system structure (retail deposit reliance, bank size and specialization, holdings of liquid assets). - Monitor and manage risks: Vigilant monitoring of bank profitability, lending behavior (especially of small and specialized banks), cash trends, and search-for-yield pressures is essential if NIRP is used or considered for deeper cuts. - Communication: Clear public communication and stakeholder engagement are important given NIRP’s political sensitivity and potential for misunderstanding. *Executive Summary — nirtsesfea (departmental paper).* ### Chapter 2 reviews the fast-growing academic literature that attempts to ### nirtsesfea - Chapter 2 reviews the fast-growing academic literature that attempts to ### Why Seek Negative Policy Rates? - Central banks adopted NIRP against the backdrop of low neutral real interest rates, when the room for conventional policy easing had been exhausted. - The neutral real rate of interest is described as the level of real rates at which demand equals potential output, and therefore there are no inflationary or deflationary pressures. - The neutral real rate has been declining globally and in many advanced economies (AEs) is estimated to be close to zero. - With inflation targets of about 2 percent, this has resulted in very low nominal interest rates as well. - Whereas the median policy easing for AEs prior to the global financial crisis was about 5 percentage points, in the following decade central banks implemented only small cuts when recessions struck. - Achieving sufficient stimulus when neutral rates are low can require policy rates to be set below zero; hence central banks turned to NIRP as part of a range of unconventional policy measures. ### NIRP and Other Unconventional Policies - NIRP can reinforce the effects of forward guidance by influencing beliefs about the path of interest rates and the lower bound. - By reducing the perceived asymmetry in possible future interest rate paths—through indicating that rates can go lower as well as higher—NIRP can lower the expected path of future rates and so long rates. - NIRP can act as a substitute for forward guidance when the credibility of the latter is imperfect; NIRP is an observable action and could be more credible and thus more effective. - The interaction between NIRP and asset purchase programs (APPs) is complex: - Both NIRP and APPs work through a “signaling channel”; to the extent that the signaling channel of NIRP is material, negative rates may reinforce the effectiveness of APPs. - APPs increase the amount of bank reserves and hence increase the burden of NIRP on bank profits; for a sufficiently large central bank balance sheet, the contractionary bank lending channel may offset the expansionary signaling channel of NIRP. - NIRP may mitigate APP’s negative effect on bank profits from maturity transformation by removing the ZLB constraint on policy rates, as long as they remain above the reversal rate. ### What Are the Limits to Negative Policy Rates? - The existence of cash means that zero is a special number for nominal, but not for real, returns; a negative nominal return is special because physical cash is technologically constrained to maintain a constant face value. - This constraint makes the return on cash dominate returns on close substitutes (central bank reserves and bank deposits) when those pay negative nominal interest rates. - Storage and insurance costs mean that the nominal return to large amounts of cash can be negative, implying that zero is not an absolute lower bound in practice. - Negative rates may induce banks to move reserve holdings to cash in vaults because overnight central bank deposits are extremely close substitutes for cash. - Practical difficulties of a wholesale move into cash (logistics of settlement at scale) temper banks’ incentive to switch from reserves to cash. - Negative rates could also make cash attractive for some households and firms, but deposits offer convenience of electronic payments and security; nonetheless, for agents with smaller liquid balances, deposits may be flightier, and nonlinear effects (massive cash withdrawals) are conceivable if rates become sufficiently negative. - Therefore, interest rates cannot be reduced below a technical minimum, the Effective Lower Bound (ELB), which may be below zero in many economies; the ELB’s primary determinant is the cost of storing and holding physical cash. ### The Effective Lower Bound (ELB) — Empirical Estimates and Observations - The ELB is the interest rate below which there would be a move away from assets that carry nominal interest charges into cash, redeemable at nominal face value. - The ELB is generally located at or below zero interest rates in AEs, although it could be higher in EMDEs. - So far no jurisdiction appears to have set a rate low enough to precipitate a material shift into cash. - Empirical estimates and examples: - Federal Reserve Board staff estimated that short-term rates could not be driven below –30/–35 basis points without triggering large withdrawals of reserves by banks (Burke and others 2010). - Estimates for Canada imply an ELB between –25 and –75 basis points, with a midpoint estimate of –50 basis points (Witmer and Yang 2015). - Witmer and Yang (2015) find that the cost of holding cash ranges between 25 and 50 basis points; if cash is used to settle payments twice a month, transportation costs would amount to 25 basis points. - Similar ELB estimates hold for the Czech Republic, euro area, and the United States and are somewhat lower for Denmark and Switzerland. - The Central Bank of Chile stated that the “technical minimum for its policy rate was 50 basis points.” ### The Effective Lower Bound in Emerging Market and Developing Economies (EMDEs) - In EMDEs, the ELB could be positive for several reasons: - Higher exposure to currency substitution and capital flight means investors may demand a risk premium on domestic currency assets; the relevant concept of ELB may be a switch to foreign currencies rather than to banknotes. - Lower financial inclusion and more common cash usage mean households may more readily move away from bank deposits into domestic cash, implying a higher ELB. - Consequently, despite low inflation and subdued economic activity, EMDEs may face a positive ELB that constrains policy rates from being pushed into negative territory. *NEGATIVE INTEREST RATES — Chapter content as provided in the source PDF.* ### 20.2 to 20.6 ### 20.2 to 20.6 ### Conceptual issues - The terms ELB and reversal rate represent distinct economic concepts: the ELB is a technical minimum below which nominal policy rates are infeasible, whereas the reversal rate is the interest rate below which adverse effects on financial intermediaries and credit dynamics could seriously impair or reverse the pass-through of policy rates to lending and deposit rates. - The reversal rate may lie above, at, or below the ELB. - The reversal rate depends on the composition of financial intermediaries’ balance sheets and income, including their capitalization (Darracq Pariès, Kok, and Rottner 2020). - Policy measures affecting intermediaries’ balance sheets (for example, micro- and macroprudential regulations), marginal returns to lending (for example, TLTRO), and implementation details (for example, tiering) contribute to determining the location of the reversal rate. - Jurisdictions where a material share of credit is provided by banks that rely heavily on retail deposits (which are thought to be sticky at zero) may face a higher reversal rate because NIRP could harm bank profitability. - Historical example: arguments were made for the UK case when interest rates there were cut to 50 basis points in 2009; subsequently the Bank of England reduced rates to 10 basis points after the 2016 Brexit referendum. - Confusion between ELB and reversal rate—central banks often refer only to the ELB—hinders informed debate on how low policy rates can go in negative territory. ### Reversal rates and other technical minima - The reversal rate can be positive in principle, although this appears unlikely in practice for jurisdictions currently implementing NIRP. - In EMDEs, the reversal rate could be positive (that is, there could be a positive interest rate below which monetary easing can be contractionary) because of interactions between capital flows and collateral constraints (Cavallino and Sandri 2020). - Central banks may estimate they will reach the reversal rate before reaching the “technical” minimum represented by the ELB, or the reversal rate may be so low as to be unreachable (as policy would lose traction because of a shift to cash before hitting it). ### The expected effects of negative interest rates - NIRP supports economic activity and inflation through the same channels as conventional interest rate cuts, but may induce discontinuities in behavior of households, firms, and financial intermediaries (for example, increased demand for cash). - A one-time revision in investor beliefs about negative rates could produce an outsized effect on long-term yields if expectations of future rates are materially revised down. - IMF estimates show that since 1998, across major bond markets, term premiums, at their lowest point, have fallen to about –1 percent (IMF 2019, Figure 1.2). - Longer-term bond yields would likely remain in positive territory if the long-term nominal neutral rate is above (positive) 2–3 percent. - With a natural rate below this threshold, long-term nominal rates may fall below zero even without policy rates going negative. ### Effects on the yield curve, bank rates, and exchange rates - Central banks can affect the entire term structure by changing expectations of future short-term rates or influencing term premiums; unconventional policy (forward guidance, QE) can also affect term premiums. - Pass-through of negative policy interest rates to bank lending and deposit rates depends on: importance of retail vs. wholesale deposits, competitive environment, adjustment costs, prevalence of fixed-rate vs. variable-rate loans, and elasticities of demand for loans and deposits. - Exchange rates are generally expected to respond to interest rate cuts below zero as they do when positive, but sensitivity to interest rate differentials could increase when rates become negative: - Adoption of NIRP may affect both the level and the distribution of expected policy rates over the medium term. - Preferred-habitat effects could cause broader classes of cross-border flows (including bank flows) to become sensitive to interest rate differentials once central banks adopt NIRP, increasing exchange rate sensitivity. - NIRP and FX intervention (FXI) could work as substitutes; literature studies whether central banks hitting ELB resort to FXI to provide additional stimulus. ### How might negative nominal rates affect households’ portfolio choices? - Negative nominal rates may induce discontinuities in households’ behavior due to money illusion, uncertainty over inflation, perceptions of unfair “penalty,” or preferences inconsistent with expected utility theory. - Prospect theory (Kahneman and Tversky 1979) and aspiration-level theory can imply sudden shifts in portfolios (for example, into more risky assets) when nominal rates turn negative: - Prospect theory requires high loss aversion to generate significant changes when risk-free rates turn slightly negative. - Aspiration-level theory can produce large shifts in allocations by introducing a discontinuity in the value function around the reference point; it predicts the first cut into negative territory has the largest effect. - Under expected utility theory, a decline in the risk-free interest rate could discourage risk-taking via wealth effects. ### How might negative nominal rates affect commercial bank profits and lending? - Banks’ net interest margins (NIM) may suffer if bank reserves pay negative nominal interest and banks cannot pass costs to depositors. - Retail customers’ resistance to negative rates could force banks that wish to maintain deposit funding to accept lower profits. - Offsetting effects for banks include: - Boost to asset values and improved loan quality (decline in provisioning charges). - Mark-to-market gains on tradeable assets. - Potential one-off equity value improvements; capital gains are transitory as new loans will be priced for improved conditions. - Brunnermeier and Koby (2019) model: optimizing banks may respond to rate cuts with higher loan rates and falling credit volumes if leverage and liquid asset constraints bind. - Alternative mechanisms: - Deposits-channel effect: banks with market power over depositors may increase lending in response to lower intermediation margins (Drechsler, Savov, and Schnabl 2017, 2018). - Risk-shifting: banks may increase lending to riskier borrowers if NIRP reduces net worth (Dell’Ariccia, Laeven, and Marquez 2014). - Net effect on bank profits and lending is empirical and depends on: - Larger retail deposits in liabilities → greater adverse impact. - Greater dependence on net interest income → greater adverse impact. - Larger share of liquid assets → greater adverse impact. - Lower pricing power → greater adverse impact. - Benefits from higher asset values and improved loan performance work in the opposite direction. - Extended periods below zero increase likelihood profitability could suffer. - Figure 2. Potential effects on bank net worth (items preserved exactly as presented in the source figure): - Negative effects - Interest learned on liquid assets - Net interest margin - – - Positive effects - Decline in provisions - Increased loan demand - Revaluation of mark-to-market assets - Net worth - + ### What could be the effects on nonbank financial intermediaries? - Negative rates could induce large outflows from money market funds (MMFs) since many MMFs function as narrow banks issuing short-term liquid liabilities and investing in safe assets; MMFs face risk of redemptions when interest rates near the effective cost of holding cash. - MMFs have limited ability to tilt portfolios toward riskier, illiquid higher-yield assets, constraining their ability to reach for yield. - MMFs that offer constant net asset value (CNAV) with negative rates face sustainability issues or must use share-cancelling mechanisms. - NIRP can discourage MMF participation via effects on fund manager compensation if management fees are a percentage of fund gross yields that remain negative. - MMFs may adapt by searching for yield within regulatory constraints, adjusting portfolio composition and remuneration of liabilities, potentially transforming the industry into one that is less liquid and riskier. - In countries where MMFs are a cornerstone of the financial system (for example, the United States), significant changes in MMF structure could threaten financial stability and affect the functioning of short-term credit and Treasury markets. - NIRP could exacerbate search-for-yield and risk-taking by other nonbank institutions: - Life insurers and institutional investors may increase risk-taking because of guaranteed positive nominal returns to policyholders and requirements to hold a fraction of assets as liquid (potentially negative-yielding) government securities. - Liability-driven investors may instead increase demand for negative-yielding safe assets to hedge duration risk (Domanski, Shin, and Sushko 2017; Shin 2017). ### Cross-border spillovers - NIRPs, like other unconventional policies, can have international spillovers by boosting asset prices globally and benefiting trade via increased activity. - Low return environment can cause excessive capital flows into emerging markets, appreciating currencies, easing financial conditions, lowering competitiveness, and threatening financial stability via excessive leverage buildup. - NIRP-specific spillover considerations: - Behavior and sensitivity of capital flows and exchange rates to interest differentials may differ when rates are negative. - The nature and combination of shocks leading to NIRP adoption could influence spillover patterns. - NIRP could reduce cross-border bank lending if it leads to declines in banks’ lending activities. - Currency denomination of international banking flows matters: euro area and Japanese banks extend credit to emerging markets mainly in US dollars; negative rates in euro area or Japan could incentivize switching from US dollar-denominated foreign debt instruments to euro- or yen-denominated ones. - This effect could be stronger if NIRPs increase the interest rate differential between US dollar assets and assets denominated in other major currencies. ### Summary - Several frictions could cause adoption of NIRP to have different effects than conventional positive-rate cuts: presence of cash, financial constraints, and bounded rationality can induce nonlinear and discontinuous responses across financial and macroeconomic variables. - Potential adverse side effects of negative rates may intensify over time as erosion of bank profits could be gradual, initial losses in net interest income may be offset by trading and fee income, and depositors and firms may be slow to shift into cash. - As benefits potentially wane over time, NIRP may be perceived as temporary and therefore less effective. - The empirical question remains whether these theoretical and potential implementation problems have materialized in economies that have implemented NIRP. *Source: IMF staff.* ### 1. Agents, including households and banks, may avoid paying negative interest rates ### 1. Agents, including households and banks, may avoid paying negative interest rates ### Key risks and mechanisms - Agents may avoid paying negative interest rates by increasing their use of physical cash; this may happen at rates not far below zero, limiting the implementation of negative rates. - Banks may be unwilling to pass negative rates on to depositors or borrowers. - Bank interest margins may shrink, and balance sheets may weaken over time. - The response of households and firms to rate cuts may be weaker than with cuts in positive territory, particularly if bank lending is materially affected. - There may be a reversal rate at which policy rate cuts become contractionary for bank lending; the reversal rate may lie above, or below, the ELB. - A prolonged period of negative interest rates may amplify financial stability concerns (for example, excessive risk-taking by financial intermediaries or exit of MMFs). - The effect of the first rate cut below zero on the yield curve may be larger than the effect of subsequent cuts to the extent that the introduction of negative rates caused agents to revise down their beliefs about the policy path. - The effects on the exchange rate may be stronger than rate cuts in positive territory. ### Quantification challenges - It is difficult to disentangle the effect of NIRP from other UMP measures because almost all NIRP announcements have been accompanied by other UMP measures. - There are not many instances of policy rate changes in or into negative territory, reducing the power of empirical approaches. - Identification of causal effects is difficult; studies with clean identification (for example, high-frequency asset price responses or micro data) provide only indirect evidence, while studies attempting to measure aggregate effects directly face important identification challenges. - Analysis suffers from a selection problem: if countries that expect high costs from NIRP do not implement it and only economies that expect low costs do, empirical studies may underestimate potential side effects. - NIRP has only been adopted in high-income economies with deep financial markets, limiting the scope for exploiting cross-country heterogeneity. ### Cash usage—empirical findings - There is no evidence of a widespread increase in the use of cash in countries that have implemented NIRPs. - In some countries the use of cash has grown over the last two decades, but there is no indication that these increases coincide with the introduction of NIRPs. - In the euro area and Japan, the ratios of banknotes in circulation to nominal GDP have been trending up over the last two decades. - Sweden has seen a significant downward trend driven by a shift to digital transactions. - In Denmark, the ratio has been stable but started to decline recently, driven by the fall in the highest denomination banknotes. - In Switzerland, there had been an increase in the use of cash starting 2008, but the trend has reversed recently. - Trends in the usage of cash have not shown significant changes in countries that have not adopted NIRP. - In most countries, the introduction of NIRP has not been followed by an increase in vault cash. In the euro area, vault cash held by MFIs remained stable during the initial NIRP announcement but increased significantly after 2016 when the ECB lowered interest rates to –0.40 percent; this was mostly driven by German MFIs (ECB 2018). - Vault cash has been increasing in the United States as well, despite policy rates remaining in positive territory. ### Financial variables—money market rates and yield curves - Money market rates have tracked policy rates closely as the latter moved into negative territory across jurisdictions. - NIRP has not weakened the pass-through of policy rates to money market rates in Denmark, the euro area, Japan, Sweden, and Switzerland (references: Jensen and Spange 2015; Eisenschmidt and Smets 2018; Angrick and Nemoto 2017; Grisse and Schumacher 2018; Bech and Malkhozov 2016). - Yield curves have shifted downward after NIRP announcements; government bond yields tend to exhibit an immediate and persistent negative response to the introduction of NIRP (Christensen 2019). - Since the introduction of negative interest rates, a large amount of short- and medium-term government bond yields have turned negative, consistent with investors revising down their beliefs about the ELB. - Arteta and others (2016) find both short- and long-term yields dropped significantly after policy announcements, with the maximum effects of NIRP occurring on two-year yields. - Japan’s case differed: NIRP led to a significant flattening of the yield curve and explains the subsequent adoption of yield curve control (YCC) by the Bank of Japan (Westelius 2020). - Once rates are negative, the impact of interest rate cuts on the yield curve appears to be similar to interest rate cuts in positive territory (Arteta and others 2016; Wu and Xia 2020). - Wu and Xia suggest successive cuts of already negative rates affect medium-term yields more strongly, possibly because of the use of forward guidance or changing market expectations about the duration of NIRP. ### Exchange rate effects - Empirical studies on NIRP effects on exchange rates find mixed evidence: - Some studies argue NIRP impacts were short-lived because other domestic and international developments dominated exchange rate evolution (Arteta and others 2016; Hameed and Rose 2018; Viñals, Gray, and Eckhold 2016). - Others conclude negative interest rates did not have any substantial impact on exchange rates (Hameed and Rose 2018). - Thornton and Vasilakis (2019) found NIRP contributed to weaker currencies and reduced exchange rate volatility. - Data on the Danish krona and the Swiss franc suggest NIRP contributed to depreciating the exchange rate, allowing central banks to reduce reliance on FXI. - NIRP may have increased the sensitivity of exchange rates to interest rate differentials by changing the investor base in currency markets (evidence cited: Lane 2019; Eisenschmidt and Smets 2019). - In Denmark, NIRP may have led to higher banking outflows and depreciation pressures, as banks switch to holding more foreign assets to offset costs of reserves receiving negative interest rates (Khayat 2018). - Adoption of NIRP seems to have provided domestic banks in Switzerland with an incentive to raise their foreign currency exposure (Basten and Mariathasan 2018). ### Other asset classes and bank equity - NIRP does not seem to have had a significant impact on equity prices in general, but bank equities may have suffered. - Stock market indexes kept rising after policy rate cuts in negative territory. - For Japan, overall stock prices reacted positively to NIRP, but Japanese banks’ stocks responded negatively (Hong and Kandrac 2018). - For the euro area, announcements of UMP (including NIRP) on average benefited banks by increasing stock prices and reducing CDS spreads (Altavilla and others 2018), but there is evidence that effects of policy rate cuts on bank equity prices turned negative since official rates went to or below zero (Ampudia and Van den Heuvel 2018; Heider, Saidi, and Schepens 2019; Balloch and Koby 2020; Bats, Giuliodori, and Houben 2020). - Banks that rely more on deposit funding experience larger stock price declines from rate cuts in low or negative territory, consistent with a perceived ZLB on deposit rates harming profitability and supporting the reversal rate hypothesis. - Evidence on corporate bonds is mixed; in some countries, indices on investment grade corporate bonds stopped rising or started falling following NIRP introduction. Composition effects in indices can confound interpretation. ### Household and firm behavior - Empirical studies of household savings and portfolio choices in response to NIRP are largely absent; the authors are not aware of empirical studies quantifying these responses in detail. *Italic: Source — nirtsesfea - 1. Agents, including households and banks, may avoid paying negative interest rates (PDF chapter/section).* ### 6. Australia, UK, US: Stock Price Index ### 6. Australia, UK, US: Stock Price Index ### Investor and Firm Behavior under NIRP - Experimental evidence on household saving and investment responses to NIRP is mixed: - Reductions in the risk-free rate can cause investors to increase the share of risky assets when rates turn negative (Baars, Cordes, and Mohrschladt 2020). - Bracha (2020) finds no change in risk-taking behavior in a similar experiment. - Experiments where investors can withdraw or keep a bank deposit with a negative nominal return suggest tolerance of negative interest rates (Efendic and others 2019, Corneille and others 2020). - Tolerance declines with the size of the deposit, the time horizon, and the size of negative rates; tolerance is higher for regular savers or when savers know rates will become positive later. - Firm-level evidence is also mixed: - Euro area firms with banks that pass through negative interest rates to corporate deposits increase fixed investment, mostly among firms with high cash holdings (Altavilla and others 2019b). - Commerzbank (2019) survey: 37 percent of nonfinancial company respondents said they would switch to other types of assets, and 32 percent said they would increase (fixed) investment in their own company when rates turn negative. - Denmark: nonfinancial firms more exposed to negative deposit rates increase fixed investment and employment and reduce leverage and bank deposit holdings (Abildgren and Kuchler 2020); initially, firms shifted away from demand deposits into higher-yielding time deposits (Jensen and Spange 2015). - Japan micro-evidence: nonfinancial firms curtail investment if they borrow from banks with greater exposure to negative rates (Inoue, Nakashima, and Takahashi 2019). - ifo Institute 2017 survey: about 30 percent of firms affected by negative deposit rates reallocated financial portfolios and repaid loans, but only 11 percent increased fixed investment (Hainz, Marjenko, and Wildgruber 2017). ### Bank Behavior: Overview - General finding: effects of rate cuts below zero on bank lending and bank lending rates largely resemble those of cuts in positive territory; magnitude depends on NIRP intensity. - Distinctiveness: impact on bank funding costs appears different—banks often raise fees and commissions for households rather than impose negative deposit rates. - Some evidence (not conclusive) that NIRP impact on lending is weakened where banking systems rely more on deposit funding and hold larger shares of very liquid assets; for such systems, NIRP may be less stimulative. ### Deposit and Lending Rates - Retail deposit response: - Banks increase fees and commissions on retail depositors to overcome the ZLB on deposit rates (Arce and others 2018; Bottero and others 2019; Basten and Mariathasan 2019). - Klein (2020) finds no evidence of a nonlinear relation between policy and deposit rates at negative policy rates for European banks. - Corporate deposit response: - Negative rates are transmitted to rates on firm deposits (Altavilla and others 2019b; Deutsche Bundesbank 2020). - Pass-through dynamics: - Deposit rates adjust slowly to lower policy rates; successive rounds of rate cuts have produced smaller and slower reductions in deposit rates. - Little evidence that short-term pass-through from policy to deposit rates slowed after NIRP adoption in Denmark and Sweden (Madaschi and Pablos-Nuevo 2017); authors do not find a changed association between policy and deposit rates after NIRP adoption except perhaps for Denmark. - Lending rates: - NIRP seems to have lowered interest rates on new mortgages and corporate loans in several jurisdictions (Denmark, euro area, Sweden). - ECB’s initial 10 basis point deposit facility rate cut had a pass-through to corporate lending rates of more than 30 basis points after three months (though accompanied by TLTROs, clouding attribution). - Heterogeneity across banks: some studies find NIRP lowered loan rates and increased lending, particularly among banks with larger shares of liquid assets; other studies find banks with high reliance on retail deposits increased loan rates or did not lower lending rates as much. ### Bank Profits - Average profitability: - On average, bank profits have not significantly deteriorated; interest income losses were offset by gains in non-interest income (fees, capital gains, insurance income) or by lower loan-loss provisions (Lopez, Rose, and Spiegel 2020; Urbschat 2019). - Larger banks likely used hedging strategies to protect margins (IMF 2020). - Contrasting evidence: - Some studies find NIRP squeezed profits through significant contraction in NIM that more than offset capital gains (Molyneux, Reghezza, and Xie 2019). - Klein (2020) finds a policy rate cut in negative territory implies a larger drop in NIM for European banks than an equivalent cut above zero. - Expectation of adverse medium- to long-term effects on profitability may explain bank stock price declines after NIRP. - Distributional effects: - Smaller and more specialized banks—those that are small, not engaged in cross-border lending, facing significant competition, real estate and mortgage specialists, or operating in floating-rate loan environments—saw the biggest declines in profits and NIM after NIRP (Molyneux, Reghezza, and Xie 2019). - Some studies find NIRP adversely affected profitability of all euro area banks, but only accounted for a small fraction of the profitability gap with US banks (Coleman and Stebunovs 2019). ### Lending Volumes and Asset Quality - Lending volumes: - Banks with more liquid assets and greater access to wholesale funding tend to increase lending more after NIRP (Bottero and others 2019; Basten and Mariathasan 2019). - Some studies find banks with a lower share of deposit funding increase credit more (Heider, Saidi, and Schepens 2019; Lopez, Rose, and Spiegel 2020). - Other studies find banks with high deposit ratios increase lending as much or more, possibly compensating for lower interest income by expanding lending volumes (Tan 2019; Schelling and Towbin 2020; Klein 2020). - One study finds no effect of NIRP on bank lending growth (Michail 2019). - Risk-taking and asset quality: - Banks take on more (but not necessarily excessive) risk after NIRP, particularly in loans and securities (Basten and Mariathasan 2019; Bottero and others 2019; Heider, Saidi, and Schepens 2019; Bubeck, Maddaloni, and Peydró 2020). - Smaller, deposit-reliant banks and banks with lower capital ratios become riskier (Nucera and others 2017; Heider, Saidi, and Schepens 2019; Schelling and Towbin 2020; Inoue, Nakashima, and Takahashi 2019). - Increased ex ante risk-taking does not translate into higher nonperforming loans ex post; additional lending often goes to financially constrained but otherwise profitable firms (Bottero and others 2019). ### Bank Funding Structure and Cross-Country Heterogeneity - Deposits as funding share at NIRP adoption: - At the time of NIRP introduction, the share of deposits held by the nonfinancial sector ranged from 15 percent in Denmark to nearly 70 percent in Japan. - Changes in reliance on retail deposits: - NIRP does not seem to have reduced banks’ reliance on retail deposits; the share of household or nonfinancial corporation deposits over total liabilities has not fallen following NIRP adoption and in some cases has risen (euro area). - Confounding factors (for example, QE) may mechanically increase deposits held by households or firms and complicate attribution. - Implication: - Country-level heterogeneity in funding structures matters for NIRP transmission; Scandinavian and euro area banking systems’ transmission is more likely to resemble conventional cuts than Japan or Switzerland given deposit share differences. *Source: nirtsesfea - 6. Australia, UK, US: Stock Price Index* ### 1. Denmark: MFI Deposits to Total Liabilities ### 1. Denmark: MFI Deposits to Total Liabilities ### Key Denmark-specific findings - Life insurance companies and pension funds in Denmark have seen their profit margins fall since 2012 (Danmarks Nationalbank 2018). - Among domestic investors, Danish life insurers and pension funds are only second to banks as holders of Danish mortgage bonds; these bonds compose 33 and 44 percent of their assets, respectively. - Returns on investment for life insurers and pension funds, since January 2018 has been between –1.10 and 1.86 percent. - For Danish krone-denominated mortgage bonds, return on investment has been between –0.09 and 0.66 (data from Danmarks Nationalbank Statbank). - The authors’ structural-break tests point to a break in the pass-through of policy rates to bank rates in Denmark covering Jul/12–Feb/13, which occurred after the adoption of NIRP (July 2012). ### Bank funding and pass-through evidence (relevant to Denmark) - The regression examined: Δ i^b_t = β0 + β1 Δ i^p_t + β2 Δ i^p_{t−1} + β3 Δ i^p_{t−2} + ε_t, where i^b is a bank deposit or lending rate and i^p is the policy rate. - Results: evidence of structural breaks in pass-through of policy rates to bank rates only in Denmark and the euro area; only Denmark’s Jul/12–Feb/13 break occurred after NIRP adoption. - Overall interpretation: estimates do not support a broad association of NIRP with structural breaks in transmission of policy rates to bank rates, but results are suggestive due to potential confounders (coincident UMP measures) and noncausal interpretation. ### Broader empirical evidence and implications relevant to Denmark - Money market funds (MMFs): - MMFs saw an increase in redemptions following the introduction of NIRP, at least for the euro area, but AUM recovered quickly (ECB 2015). - MMF profitability mainly depends on the difference between the rate on the central bank deposit facility and the yield on short-term debt securities. - Behavioral changes under negative rates included waiver of management fees and extended maturities of investments; CNAV reverse distribution mechanism was used initially but has since been halted by ESMA. - Caveat: if policy rates become very negative, flight for cash could be detrimental to banks and MMFs; the observed resilience may reflect only mildly negative policy rates so far. - Impact on inflation and output: - Rostagno and others (2019) find unconventional monetary policies had a combined effect over 2015–18 of about 2.7 percent on GDP and one-third of a percentage point on inflation; about one-fifth of the overall impact is assigned to NIRP. - This implies a staggered 50 basis point rate cut yields about 0.5 percent increase in GDP and 0.07 percent point increase in inflation. - Estimated effect of a 100 basis point policy rate cut (pre-GFC, away from ZLB): United States 0.5–1 percent increase in output; United Kingdom 0.5–1 percent; euro area 0.3–0.7 percent; Japan 0.7–0.8 percent. - QE estimates for effect of a 100 basis point drop in long-term rates: United States rise in GDP and CPI of 1.1–1.4 percent and 0.9–1.5 percent respectively; United Kingdom 2.5–3 percent in GDP and 1.5–4.2 percent in CPI; select euro area countries 0.75–1 percent in GDP and 0.35–0.6 rise in CPI. - Overall: evidence suggests countries that implemented NIRP have yet to reach the reversal rate, which may be at or below –1 percent (Darracq Pariès, Kok, and Rottner 2020). - Cross-border spillovers: - Few studies exist; evidence is limited and mixed. - Some positive spillovers documented: NIRP in Japan to Asian equity markets (Fukuda 2018); ECB NIRP to financial markets in Czech Republic, Poland, Romania, Sweden (Varghese and Zhang 2018) and to bond yields in Asia (Feldkircher, Huber, and Punzi 2020). - Other work finds AEs’ adoption of NIRP had positive spillovers to EMDE asset prices similar to other expansionary monetary policy announcements (Arteta and others 2016). - No comprehensive, systematic assessment of cross-border flows to/from non-NIRP economies was identified. ### Policy responses and implementation lessons (relevant to Denmark and general) - Tiering reserve regimes: - Several central banks have introduced tiering to mitigate NIRP impact on bank profitability by remunerating a share of reserves at a rate higher than the marginal policy rate. - Implementation varies; exemptions can be proportional to reserve requirements or reflect money market activity; exempt-reserve rates can be zero (euro area, Switzerland). - Japan: only case of a 3-tier system with three different remunerations (positive on basic balance, zero on macro add-on balance, negative on policy-rate balance). - Trade-off: exemption must be large enough to lower average cost of holding reserves but not so large that money market rates drift away from the marginal policy rate. - Experience: tiering has not hindered monetary transmission while supporting bank interest margins; counterfactual evidence for Japan suggests a small beneficial effect on bank lending (Balloch and Koby 2020). - Growing excess reserves from QE may complicate this trade-off. - Communications: - Central banks should clearly justify NIRP and explain expected effects and channels, linking NIRP to macro outlook and objectives. - Communication should address uncertainty about effects and financial-stability implications; emphasize monitoring of pass-through to deposit and lending rates and readiness to act (for example, tiering). - Recommendations: - Explain expected benefits and likelihood/size of potential side effects of modestly negative rates. - Push back against a perceived “red line” at zero. - Stress continuous monitoring and readiness to alleviate side effects. - Highlight difference between nominal and real interest rates and emphasize real rates’ prominence for macro conditions. - Use “tiered” or “targeted” communications tailored to stakeholders’ economic literacy. - Some central banks (Federal Reserve, Bank of England) refrained from introducing negative rates during the Great Recession citing potential damage to financial markets and financial-stability risks. ### Open questions and caveats - Many theoretical adverse effects associated with NIRP have not materialized strongly so far; transmission mechanisms do not appear to change significantly and bank profitability has not significantly suffered to date. - The reversal rate remains a theoretical concept not empirically validated and likely not yet breached. - Unknowns include the impact of prolonged or deeper negative rates, and effects on financial intermediaries beyond banks (pension funds, insurers). - Evidence is limited by confounding with other unconventional monetary policies and by scarcity of cross-country empirical work on certain channels (for example, cross-border flows). *Italic: Source — Excerpts from "NEGATIVE INTEREST RATES" (IMF staff paper).* ### Conclusions ### Conclusions ### Non-linearities, nonbanks, and market rates - Other non-linearities may arise when market rates become negative; legal or behavioral constraints to offering negative nominal returns could affect the profitability of nonbanks. - Given the importance of these institutions for the financial system, the absence of empirical evidence on the impact of negative rates on their behavior is surprising. ### Bank competition and the corporate channel - The role of bank competition in shaping outcomes is not yet well understood. Absent competition from other intermediaries or capital markets, the transmission of negative policy rates to bank lending rates will be weaker, as banks would try and preserve their intermediation margin. - No study has tested this hypothesis, despite the availability of relevant data. - Future research should further study the determinants of the corporate channel identified by Altavilla and others (2019b): - According to that channel, cash-rich firms with relationships with banks that charge negative rates on deposits are more likely to use their liquidity to increase investment. - Unclear drivers include the role of multiple bank relationships: if firms can easily move liquidity across financial institutions (including nonbanks), negative rates on corporate deposits may simply lead to reallocation across intermediaries without significant impact on investment. - Frictions that prevent firms from easily establishing new bank relationships could induce reallocation from corporate deposits to less liquid assets, such as fixed capital. ### Why central banks have not resorted to NIRP more often - NIRP may not be a first-choice policy option because central banks have other unconventional policy options (quantitative easing, credit easing, funding-for-lending schemes, YCC). - A reasonable inference is that those central banks judge that the least costly means of meeting their objectives does not involve NIRP. - NIRP may be perceived as costly in jurisdictions that allow CNAV MMFs, at least in the short term. - Specific institutional constraints matter: - In some jurisdictions, central banks may lack the authority to set negative rates. - Other jurisdictions may be unable to easily enact other forms of unconventional monetary policy (for example, potential constraints on the ECB’s ability to undertake purchases of government securities arising from prohibitions on monetary finance written into European treaties). - The structure of funding markets may discourage some central banks from pursuing NIRP: - Economies where banks rely extensively on retail deposits. - Economies where MMFs intermediate a significant fraction of savings, especially if most of those funds have constant or stable NAV. - Nonetheless, the experiences and evidence surveyed should dampen these concerns, at least for moderately negative rates. ### Retaining NIRP as part of the toolkit and expectation effects - Central banks should not rule out NIRP and should keep it as part of their toolkit, even if they are unlikely to use it. - Allowing for the possibility of temporary cuts into negative territory could shift expectations and be effective in lowering long-term rates. - If markets internalize that rates can be cut below zero or below what was previously seen as their effective minimum, the shift in market expectations is likely to produce declines in longer horizon yields—even if the move is initially seen as temporary. - This suggests a greater loosening effect of NIRP for countries that currently have low but positive rates. ### Potential depth of the effective lower bound (ELB) and limits - The absence of a flight to cash at moderately negative interest rates could mean that the ELB is deeply negative, probably below the estimates of about –0.5 to –0.75 percent from many older studies and perhaps as low as –2 percent (Lilley and Rogoff 2019). - Deeply negative rates could be effective as a temporary tool in extreme situations, and may be required given that AE central banks, on average, cut policy rates by 500 basis points in typical recessions. - There is considerable uncertainty about how negative rates can become before significant adverse effects on bank lending become apparent. - Prolonged periods of negative rates could elicit strong pushback from households and certain segments of the financial sector (for example, money market funds). - Implementing even more negative rates may require more extreme measures such as taxes on cash or the elimination of large denomination bills. ### Country case studies - Denmark - In July 2012, the Danish central bank cut its main official policy interest rate—the interest rate on bank certificates of deposit—into negative territory to defend the krone’s peg with the euro. - Since 2017, evidence shows negative rates are increasingly being transmitted to both deposit and lending rates: - Several commercial banks are charging the central bank’s benchmark rate (–0.75 percent) on corporate and moderate-size retail deposits. - 10-year mortgages are being issued at rates as low as –0.5 percent. - Interest rates on short-term bank loans to nonfinancial corporations have been close to zero since at least mid-2018. - Successful transmission to lending rates partly reflects Denmark’s unique mortgage market where originators collect fees and then securitize loans. - Bank profits in Denmark have not suffered despite most of the last eight years of negative rates, due partly to adaptation of business models and greater reliance on fee income. - Lending to mature firms with negative interest coverage ratios (ICR) as a share of total lending has declined since 2011. - Euro Area - The ECB introduced NIRP in June 2014 by lowering the interest rate on its deposit facility to –0.10 percent, cutting it four more times in 10 basis point steps to –0.50 percent since September 2019. - The deposit rate has been the relevant ECB policy rate since the sovereign debt crisis. - Banks in the euro area hold a large amount of excess liquidity due to other unconventional measures. - Main reason for NIRP: provide additional monetary stimulus amid strong disinflationary pressures; also to widen the interest rate corridor and incentivize interbank market activity and reduce segmentation. - Effects: - Transmission of negative rates has been fast and effective; exchange rate depreciated significantly after NIRP, boosting exports and economic activity. - Bank lending rates have declined for households and firms; dispersion across countries has fallen. - Reduction in cost of credit has supported credit growth and investment. - Transmission to deposit rates quick, though it seems to have slowed as they approach the ZLB; use of cash does not seem to have grown. - Boucinha and Burlon (2020) provide evidence that negative interest rates have supported economic activity and contributed to price stability. - Concerns about negative policy rates’ impact on bank profitability led the ECB in September 2019 to introduce a multi-tier regime: - Two-tier system for reserve remuneration in which liquidity up to six times the reserve requirement is remunerated at zero percent rather than at the deposit facility rate. - Both the multiplier and the interest rate can be changed over time. - Aims to weaken side effects on bank profitability and increase average return on reserves, disincentivizing substitution with cash. - In March 2020, the ECB lowered the interest rate on funds borrowed through TLTROs to negative territory: - Banks that met determined thresholds were charged an interest rate 0.5 percent below the average rate on the deposit facility prevailing between June 2020 and June 2021, and in any case not higher than –1 percent. - Effects differ from a cut in official rates because TLTROs reduce the cost of funding of financial intermediaries, softening potential side effects associated with NIRP. - Japan - The BOJ announced on January 29, 2016, that a negative interest rate on excess reserves would be implemented on February 16, 2016, nearly three years after the introduction of quantitative and qualitative easing (QQE). - QQE had helped boost activity, inflation, and inflation expectations, but inflation stayed below the 2 percent target. - BOJ complemented QQE with NIRP to further lower the short end of the yield curve and reinforce commitment to a 2 percent inflation target. - BOJ analysis suggested the improvement in the output gap from a unit decline in the real interest rate was largest at maturities of 1–2 years and smaller at longer maturities. - Effects: - Interest rates across the entire yield curve fell and the yield curve flattened; large drop in longer maturities partly due to continued JGB purchases compressing risk premiums. - Search for positive yield increased demand for assets with positive interest rates, driving down super-long-term JGB yields. - Lending and deposit rates fell, compressing lending margins, but without evidence that intermediaries’ functioning was impaired—partly due to a three-tier reserve deposit system introduced by BOJ. - NIRP translated into a fall in corporate yields, triggering increased issuance of very long-term corporate bonds. - Overall, NIRP stimulated activity and inflation but was insufficient to achieve BOJ’s 2 percent target; BOJ introduced a new framework (QQE with Yield Curve Control) on September 2016 to control short-term and long-term rates and commit to overshooting the inflation target. - Sweden - In July 2009, the Riksbank lowered its repo rate to 25 basis points and its deposit rate to –25 basis points; the repo rate is Sweden’s main policy rate. - The period of negative rates did not last long; by mid-2010 rates moved upward amid concerns about financial imbalances. - In February 2015 the repo rate was set below zero at –10 basis points; further cuts brought it to –50 basis points between February 2016 and January 2019. - NIRP was enacted alongside an asset purchase program and forward guidance. - In December 2018 the Riksbank announced rate increases; in December 2019 it became the first central bank to announce its exit from NIRP, increasing the repo rate back to zero. As of January 2021, the deposit rate remains negative at –10 basis points. - Effects: - Evidence that the Riksbank’s negative rate policy resulted in Swedish banks cutting both deposit and lending rates. - Pass-through to deposit rates appears to have weakened with successive cuts. - Some research points toward small negative effects, or even slightly positive effects, on lending rates from NIRP. - More than three years after NIRP was introduced, Swedish banks continued to report strong profitability. - Switzerland - The SNB adopted negative rates on commercial bank deposits to keep Swiss interest rates below those of the euro and stem a capital inflow surge to prevent excessive appreciation of the franc and associated deflationary pressure. - Following ECB QE in August 2011, the three-month interest rate differential between the franc and the euro vanished. The SNB imposed a floor on the franc/euro exchange rate until January 2015, after which it cut the deposit rate to –0.75 and negative interest rate differential returned. - The SNB complemented NIRP with active FX market interventions, leading to a large expansion of its balance sheet. - Effects: - Initial pass-through to bank lending rates was low, suggesting the exchange rate channel was more relevant. - Rate cuts into negative territory produced a level shift in the yield curve and did not weaken transmission of short rate cuts along the curve. - Swiss banks did not initially reduce lending rates, including mortgage lending; possible reasons include inability to reduce funding costs due to low pass-through to deposit rates, market power in lending, or rising credit risk. - More recently, shorter-term lending rates have seen sizeable declines. *Conclusions — nirtsesfea - Conclusions* ### Annex 1. Country Case Studies ### Annex 1. Country Case Studies ### Swiss experience with negative rates - Low pass-through of negative rates to deposit rates at commercial banks has meant that the risk of cash hoarding by depositors is still low. - The SNB has gone farther than any other central bank in setting a negative interest rate. - Significant exemptions have meant that the average rate on deposits at the SNB is significantly higher than the marginal rate. - Commercial banks have refrained from passing on negative rates to small depositors, so the ZLB still holds for these deposits. - Therefore, the SNB may still have room to cut the marginal deposit rate further (Jordan 2020), at least based on market-implied beliefs (Grisse and Schumacher 2018). - Footnote: Several Swiss banks are now charging interest on large deposits (for example, Revill and Hirt 2019). ### Annex 2. Tests of Structural Breaks after NIRP — policy and bank rate definitions by country - Denmark - Policy rate: Interbank rate “Tomorrow/Next” - Bank rate on household deposits: Interest rate on domestic deposits in DKK held by households - Bank rate on NFCs deposits: Interest rate on domestic deposits in DKK held by nonfinancial corporations - Bank rate on mortgages to households: Interest rates on new loans to households for house purchase - Bank rate on loans to NFCs: Interest rates on new loans to nonfinancial corporations (Including repos) - Euro area - Policy rate: EONIA - Bank rate on household deposits: Interest rates on new overnight deposits held by households - Bank rate on NFCs deposits: Interest rates on new overnight deposits held by nonfinancial corporations - Bank rate on mortgages to households: Interest rates on new loans to households for house purchase with initial maturity up to one year - Bank rate on loans to NFCs: Interest rates on new loans to nonfinancial corporations with initial maturity up to one year (excluding revolving lines) - Japan - Policy rate: Uncollateralized overnight interbank rate - Bank rate on deposits: Interest rate on ordinary deposits - Bank rate on time deposits: Average interest rate on time deposits - Bank rate on mortgages to households: Interest rate on housing loans with floating rates by city banks - Bank rate on loans to NFCs: Interest rates on new short-term loans - Sweden - Policy rate: STIBOR “Tomorrow/Next” - Bank rate on household deposits: New bank deposit rates for households - Bank rate on NFCs deposits: New bank deposit rates for nonfinancial corporations - Bank rate on mortgages to households: New bank loans to households for housing - Bank rate on loans to NFCs: New MFI loans to nonfinancial corporations - Switzerland - Policy rate: Swiss three-month LIBOR - Note: As of June 13, 2019, the SNB policy rate replaced the target range for the three-month Swiss franc LIBOR previously used in the SNB’s monetary policy strategy. - Bank rate on deposits: Interest rate on savings deposits for private clients - Bank rate on mortgages to households: Interest rate on mortgages with fixed interest rates - Bank rate on loans to NFCs: Interest rate on investment loans with fixed interest rates * nirtsesfea - Annex 1. Country Case Studies * ### 2020. https:// www .ecb .europa .eu/ press/ pr/ date/ 2020/ html/ ecb .pr200318 ### NEGATIVE INTEREST RATES (References section) ### Major themes covered in the cited literature - Transmission of negative interest rates across borders and to other asset prices (examples: “The Transmission of Euro Area Interest Rate Shocks to Asia—Do Effects Differ When Nominal Interest Rates are Negative?”; “Monetary Policy’s Rising FX Impact in the Era of Ultra-low Rates”; “Negative Interest Rate Policies and Exchange Rate Behavior”). - Effects on bank profitability, lending, and bank behavior (examples: “Life below Zero: Bank Lending under Negative Policy Rates”; “How Japanese Banks Reacted to Negative Rates”; “The Profitability of Banks in a Context of Negative Monetary Policy Rates: The Cases of Sweden and Denmark”; “Implications of Negative Interest Rates for the Net Interest Margin and Lending of Euro Area Banks”). - Monetary transmission, term structure dynamics, and long-term yields at low and negative rates (examples: “Term Structure Dynamics at Low and Negative Interest Rates—Evidence from Switzerland”; “Lower-Bound Beliefs and Long-Term Interest Rates”; “Measuring the Effect of the Zero-Lower Bound on Medium- and Longer-Term Interest Rates”). - Interaction with unconventional policies such as quantitative easing (examples: “Four Stories of Quantitative Easing”; “Assessing the Economy‐wide Effects of Quantitative Easing”; “What Are the Macroeconomic Effects of Asset Purchases?”). - Country- and region-specific assessments and case studies (examples: Japan: “The Effectiveness of the Negative Interest Rate Policy in Japan”; Euro area: “Negative Interest Rates in The Euro Area: Does It Hurt Banks?”; Switzerland: “Small Country - Big Challenges: Switzerland’s Monetary Policy Response to the Coronavirus Pandemic”). - The effective lower bound, policy design, and theoretical considerations for negative rates (examples: “Negative Interest Rate Policy (NIRP): Implications for Monetary Transmission and Bank Profitability in the Euro Area” IMF Working Paper 16/172; “Optimal Negative Interest Rate under Uncertainty”; “The Case for Implementing Effective Negative Interest Rate Policy”). - Deposit behavior, demand for cash, and distributional/behavioral aspects (examples: “Interest Rate Pass-through and the Demand for Cash at Negative Interest Rates”; “Pushed Past the Limit? How Japanese Banks Reacted to Negative Rates”; “The Curse of Cash”). ### Representative papers, working papers, and speeches (selected identifiers and dates) - Jobst, Andreas, and Lin, Huidan. 2016. “Negative Interest Rate Policy (NIRP): Implications for Monetary Transmission and Bank Profitability in the Euro Area.” IMF Working Paper 16/172, International Monetary Fund, Washington, DC. - Hong, Gee Hee, and John Kandrac. 2018. “Pushed Past the Limit? How Japanese Banks Reacted to Negative Rates.” IMF Working Paper 18/131, International Monetary Fund, Washington, DC. - Klein, Melanie. 2020. “Implications of Negative Interest Rates for the Net Interest Margin and Lending of Euro Area Banks.” Deutsche Bundesbank Discussion Paper 10/2020, Deutsche Bundesbank, Frankfurt am Main. - Rostagno, Massimo, et al. 2016. “Breaking through the Zero Line: The ECB’s Negative Interest Rate Policy,” Presentation at Brookings Institution, June 6, Washington, DC. - Viñals, Jose, Simon Gray, and Kelly Eckhold. 2016. “The Broader View: The Positive Effects of Negative Nominal Interest Rates.” IMF Blog, April 10. - Westelius, Niklas J. 2020. “Twenty Years of Unconventional Monetary Policies: Lessons and Way Forward for the Bank of Japan.” IMF Working Paper 20/226, International Monetary Fund, Washington, DC. - Ulate Campos, Mauricio. 2021. “Going Negative at the Zero Lower Bound: The Effects of Negative Nominal Interest Rates.” American Economic Review 111 (1): 1–40. - Lane, Philip R. 2019. “The International Transmission of Monetary Policy.” European Central Bank, Frankfurt am Main. - McAndrews, James. 2015. “Negative Nominal Central Bank Policy Rates: Where Is the Lower Bound?” Remarks at the University of Wisconsin, May 8. ### Cross-cutting empirical and theoretical findings referenced - Multiple studies examine interest rate pass-through and bank margins in negative rate environments (examples include journal articles, ECB Occasional Paper 195, and central bank working papers). - Several contributions investigate exchange rate responses and international spillovers of negative policy rates. - The literature addresses both macroeconomic propagation (term structure, yields, quantitative easing interactions) and microeconomic channels (bank lending, deposit flows, credit allocation). - Policy design discussions include evaluations of the effective lower bound, optimal negative rates under uncertainty, and practical implementation issues for central bank toolkits. ### Policy-relevant takeaways reflected in the references - Negative nominal policy rates are studied as part of a broader toolkit including asset purchases and other unconventional tools. - Bank profitability and the net interest margin are recurring policy concerns in assessing NIRP implications for credit supply. - Cross-border spillovers and exchange rate effects are important considerations for small open economies and in assessing international transmission. - Empirical evidence is mixed and context-dependent; country-specific studies (Japan, Sweden, Denmark, Switzerland, Euro area) provide varied assessments of costs and benefits. *Source: References from the chapter "NEGATIVE INTEREST RATES" (2020).* --- _Source: https://www.imf.org/-/media/files/publications/dp/2021/english/nirtsesfea.pdf_