The Evidence Is in on Negative Interest Rate Policies
IMF Blog, March 3, 2021
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- Authors: Gaston Gelos
- Published: March 3, 2021
Summary and context
- Publication author: Gaston Gelos.
- Date: March 3, 2021.
- Context: After eight years of experience with negative interest rate policies, evidence suggests these policies have worked to ease financial conditions and likely supported growth and inflation.
- Since 2012, central banks in Denmark, euro area, Japan, Sweden, and Switzerland adopted negative interest rate policies in response to persistently below-target inflation rates and a very low “neutral real interest rate.”
Effects on financial conditions, inflation, and growth
- Negative interest rate policies have:
- Eased financial conditions.
- Likely supported growth and inflation.
- Stimulated inflation and output by roughly as much as comparable conventional interest rate cuts or other unconventional monetary policies.
- Been estimated in some studies to be up to 90 percent as effective as conventional monetary policy.
- Led to lower money-market rates, long-term yields, and bank rates.
Behavior of banks, markets, and depositors
- Deposit-rate dynamics:
- Deposit rates for corporate deposits have dropped more than those on retail deposits because it is costlier for companies than for individuals to switch into cash.
- Lending and bank behavior:
- Bank lending volumes have generally increased.
- Larger banks have increased lending, introduced fees on deposit accounts, and benefited from capital gains.
- Banks that rely more on deposit funding—as well as smaller and more specialized banks—have suffered more adverse impact on profitability.
- Cash hoarding and rate limits:
- Neither banks nor their customers have markedly shifted to cash, suggesting interest rates can probably become even more negative before large-scale cash substitution occurs.
- Money market funds and risk-taking:
- Money market funds in adopting countries have not collapsed.
- The increase in bank risk-taking does not appear to have been excessive.
- If a “low-for-long” environment causes search for yield or excessive risk taking, negative interest rate policies per se do not appear to have compounded the problem.
Financial stability and profit effects
- Any adverse effects on bank profits and financial stability have so far been limited.
- Caveats:
- The absence of a significant impact on bank profitability may reflect shorter-term effects that could be reversed over time.
- Side effects may still arise if policy rates go even more negative or if negative rate policies persist for a very long time.
Institutional, structural, and political considerations
- Reasons for limited adoption:
- Institutional and legal constraints may deter adoption.
- Financial system structure or interconnection with global markets may make some countries more prone to adverse side effects.
- Countries with many small banks relying on household deposits may be more reluctant to adopt negative interest rates.
- Adoption posture:
- Even adopting central banks have moved tentatively, typically implementing small interest rate cuts because of the risk that negative side effects become more apparent with deeper or prolonged negative rates.
- Policy implication:
- Central banks that adopted negative rates may be able to cut them further.
- Non-adopting central banks should not rule out adding a similar policy to their toolkit—even if they may be unlikely to use it.
- Ultimately, given the low level of the neutral real interest rate, many central banks may be forced to consider negative interest rate policies sooner or later.
Research provenance
- This blog entry is based on work by Luis Brandao-Marques, Marco Casiraghi, Gaston Gelos, Gunes Kamber, and Roland Meeks.
IMF Blog: The Evidence Is in on Negative Interest Rate Policies